A:

Because of the small market capitalization and revenues typical of most penny stocks, there are very few that offer dividends. However, there are some, and investing in dividend-paying penny stocks can reduce the overall risk exposure of a penny stock portfolio.

Penny stocks are defined in two ways. As stocks trading for less than $5 a share, many of which may be listed on the major stock exchanges such as the NYSE or Nasdaq; or literal penny stocks that trade for less than $1 a share and are traded only on the over-the-counter bulletin board (OTCBB), or through the pink sheets.

How to Find Penny Stocks That Pay Dividends

Because there are so few penny stocks that pay dividends, it is important for investors to conduct a logical and thorough search to locate them. One simple method is doing an online search using phrases such as "penny stocks that pay dividends" or "list of penny stocks that pay dividends." Doing this usually locates at least a partial list of dividend-paying penny stocks. Another method, one more likely to provide a fairly exhaustive list, is to use any of a number of online stock screeners that are available for free.

Using this method, an investor can first screen for penny stocks by applying the filter of a maximum stock share price of $5 or $1, depending on the individual investor's preference and personal working definition of penny stock. The investor can then apply the additional filter of only including stocks with a dividend payout ratio greater than zero to the resulting stock list. This process usually yields a current list of 100 to 150 penny stocks that offer dividends. 

How Dividend-Paying Penny Stocks Can Improve a Penny Stock Portfolio

The majority of penny stocks do not provide significant returns on investment from the appreciation of the share price, and in fact, many penny stock trades lose money. Purchasing dividend-paying penny stocks is one way an investor can improve the overall investment returns realized from a portfolio composed of penny stocks.

For example, suppose an investor purchases 1,000 shares each of three penny stocks, all selling for exactly $1 per share. Over the course of a year, the share price of stock A remains unchanged, the share price of stock B drops to 50 cents and the share price of stock C doubles to $2 per share. The investor's net return on investment (ROI) for the year is $500, resulting from no change in stock A, a $500 loss in stock B and a $1,000 profit in stock C. Suppose each of the three stocks paid an annual dividend of 5 cents per share. This increases the investor's net profit by $150, or 3,000 total shares times $0.05, a more than 20% improvement in ROI.

Investors should note dividends alone do not guarantee profitable penny stock trading. In the example above, stock B is still an overall losing investment even with the dividend payment. However, the dividend payment serves to mitigate the loss.

(For related reading, see "The Lowdown on Penny Stocks.")

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