Scoring Income from Penny Stock Plays
Apr 17th, 2009 | By Jonas Elmerraji | Category: Featured, Investing Strategies
When it comes to stock investing, there are only two ways to make money: capital gains and dividends. And for small-cap investors, it’s all about those capital gains – selling your shares for more than you bought them.
It’s no surprise that dividends are a pretty foreign concept to the people looking for penny stocks that’ll grow 279% (like Dendreon Corp (NASDAQ: DNDN) just did for Penny Stock Fortunes subscribers).
But not so fast… not only are dividends a dependable income source in a tough market, they’re also a phenomenal way to grow your portfolio in no time flat. Now more than ever, penny stock investors should be looking at the potential of dividends. Here’s why…
The chart above shows the difference between compound interest (like growing your portfolio at 10% per year) compared to investing in stocks that deliver dividends.
Even if you’re not concerned about collecting the income that dividend stocks provide, it’s clear that reinvesting those dividends into your portfolio can bring terrific returns.
And if you’d rather cash that dividend check, as recently as April 15 we’ve been reminded of yet another reason why dividends can trump capital gains – taxes. Under current tax laws, dividends will be taxed at a lower rate than capital gains for most people until at least 2010.
What’s more compelling, though, is the staying power of dividends. Over the course of the last year we’ve seen share prices take a precipitous dive while dividends were much less dramatically affected. So while capital gains may have been few and far between in 2008, dividends weren’t.
Potential Penny Stock Dividend Plays
Now is an especially attractive time to invest in dividend-paying penny stocks. One of the main reasons for that is because so many blue chips and mid-caps have been beaten down into small-cap status while keeping their dividends in place.
Just look at S&P 500 constituents Apartment Investment and Management Co. (NYSE: AIV) and Integrys Energy Group Inc (NYSE: TEG) – each has fallen into small-cap status in the last 12 months, and boast dividend yields of 36% and 10% respectively.
Where else can you get returns like that?
If you’re interested in sticking with more traditional penny stock plays, the Standard Register Company (NYSE: SR) and United Online (NASDAQ: UNTD) are interesting income stocks worth less than $400 million. The companies’ yields are currently 17% and 8% respectively.
What to Watch with Your Dividend Investments
Investing for income is never as simple as picking the small-cap stocks with the highest dividend yields. Sometime those yields are that high for a good reason – no one would think about investing in some high-yield companies without the income checks.
It’s important to evaluate a potential income investment’s fundamentals carefully. If a company has been paying out hefty dividends without achieving profitability, the dividend likely isn’t sustainable and it’s best to stay away.
When you invest solely on the basis of dividends that are getting cut, you’re just setting yourself up for some capital losses.
While there are certainly potholes to look out for in the income investing world, on the whole the opportunities out there right now far outweigh the risks. Want your penny stocks to bring in cold hard cash before you sell them? Look for dividend dollars.
Cheers,
Jonas Elmerraji
April 17, 2009
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