We recently compiled a list of the 12 Best Dividend Penny Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where Lloyds Banking Group plc (NYSE:LYG) stands against the other dividend penny stocks.
For investors who look for potential for quick gains at a low investment price point, penny stocks can be an attractive but risky stock investment option. Stocks that typically trade under $5 fall under this category, but they can go as low as $1 in some cases. While many of these stocks are a red flag for high volatility, dividend penny stocks offer some security to investors as they balance the risk with some stability and income. They provide the added benefit of a regular income. Investors with high-risk tolerance often seek these stocks to enter high-potential markets. For those seeking to grow their portfolios without taking great levels of risk, dividend-paying penny stocks can be an interesting opportunity.
Often when prices spike in the market, the low-priced shares offer the opportunity to make attractive gains as they allow investors to hold a large number of shares for a small amount of capital. However, these shares also belong to companies that are often under-the-radar with the risk of prices sometimes even falling to zero. They are often considered stocks lacking liquidity and are highly speculative due to small market capitalization. Given their speculative nature, it is recommended to conduct thorough research before investing in penny stocks.
Unlike blue-chip companies trading on major stock exchanges, many penny stocks trade over-the-counter (OTC) or through Pink Sheets where listing requirements are more relaxed. With low levels of information available, these stocks are also susceptible to pump-and-dump schemes. Even though dividend penny stocks pay out dividends, they are not entirely free of the inherent risks and may wind up cutting dividends as a first line of defense when the market goes awry. The majority of these companies are either in their early growth stage or are companies facing financial difficulties. Many of these companies fail to perform or go bankrupt, leading to substantial losses for investors.
Investing in dividend penny stocks also requires a thorough understanding of financials and carefully selecting a portfolio. Investors should look out for a history of regular dividends and a reasonable dividend yield.
In a broader market context, penny stocks tend to underperform large-cap in the longer term due to their inherent financial risks and instability. Less than 10% of penny stocks graduate to higher stock data, while some end up getting delisted. However, there are instances of penny stocks performing outstandingly and transitioning into mid-cap and even large-cap stocks. While over 90% of OTC penny stocks underperform over five years, it was noted that small-cap stocks that pay dividends out-perform their non-dividend paying counterparts by over 2-3% annually. This might not seem significant, but these figures provide some context in a highly speculative market with less transparency.
While typically penny stocks are avoided by hedge funds due to their limited stability and scalability, some funds specializing in small-cap or high-risk investments do engage with these stocks. In instances where hedge funds identify undervalued penny stocks with strong growth potential, they may accumulate significant positions and sometimes influence stock price movements.
The number of penny stocks trading on American Stock Exchanges has seen unusual spikes in recent years and has significantly risen by 72% in 2023 alone; this has prompted market regulators to introduce stricter listing rules to protect investors.
Recent analyses have identified several penny stocks demonstrating bullish technical patterns and have shown promising trends, with breakouts above key resistance levels. As hedge fund involvement in a penny stock may indicate that the company has strong growth potential, undervalued assets, or an upcoming catalyst that could drive its stock price higher, investing in the best dividend stocks according to hedge funds can be one way to vette stocks within a highly fluctuating market. Given this, we will take a look at some of the best penny stocks that pay dividends.
Our Methodology
To come up with our list of best dividend penny stocks to buy according to hedge funds, we screened for stocks that have a share price of $5 or below, with 5% or above dividend yields. From this list, we picked 12 dividend penny stocks with the highest number of hedge funds using Insider Monkey’s proprietary database of hedge funds and their holdings, as of Q3 2024. While these stocks pay dividends, their dividend policies may be inconsistent or vary significantly considering their high volatility and risk nature.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 363.5% since May 2014, beating its benchmark by 208 percentage points (see more details here).
An aerial shot of a business district with the company’s headquarters towering above its competitors.
Lloyds Banking Group plc (NYSE:LYG)
Stock Price: $3.37
Number of hedge fund holders: 10
Lloyds Banking Group plc (NYSE:LYG) is a UK-based financial services organization, offering a comprehensive range of banking and financial products primarily to retail and commercial customers. The bank operates through three main segments: Retail, Commercial Banking, Insurance, Pensions, and Investments. The bank is also the UK’s largest mortgage provider, playing a crucial role in the housing finance sector with over £300 billion of mortgage booked. The stock surged by nearly 48% in the past 12 months, LYG is one of the best penny stocks that pay dividends.
As the UK financial has been experiencing increased regulatory scrutiny in a bid to protect investor interests and banking customers, more banks are being faced with regulatory fines. Lloyds Banking Group plc (NYSE:LYG) has recently faced challenges due to a regulatory probe into its motor finance operations, due to which the bank has channelized additional capital to provisions, affecting the annual pre-tax profits. There was a 20% decline to £5.97 billion in annual pre-tax profits, however, the company reported a solid underlying performance, with net income slightly surpassing expectations at £4.38 billion for the fourth quarter. The bank has recently announced a £1.7 billion share buyback program, underscoring its commitment to returning capital to shareholders.
For dividend-focused investors, Lloyds Banking Group plc (NYSE:LYG) is a compelling opportunity, as the bank’s dividend yield remains above the FTSE average of 3.6%. The forecasts indicate a continued growth in shareholder returns.
For its future plan, the bank is increasingly investing in modernization efforts. It has earmarked a £4 billion plan aimed at technological advancements and expanding into more stable markets such as wealth management. The strategic moves will help diversify revenue streams and strengthen the bank’s market position. Overall, Lloyds Banking Group plc (NYSE:LYG) presents a lucrative opportunity for dividend-seeking investors as a leading market player in the UK financial sector.
Overall LYG ranks 11th on our list of the best dividend penny stocks to buy according to hedge funds. While we acknowledge the potential of LYG as an investment, our conviction lies in the belief that some stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for a stock that is more promising than LYG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.