7% dividend yield! Here’s 1 penny stock I’d consider for my portfolio

I’m looking for high-yield dividend shares with lots of potential to add to my portfolio. This lesser-known penny stock is on my watchlist.

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Rising dividend yields mean some penny stocks now offer promising returns. A dividend yield is a percentage of profits that companies pay investors in appreciation of their support.

Reliable dividend payments can help to keep my portfolio profitable even if share prices are stagnant.

With a decline in some share prices, many firms are pumping up their dividend yields to appear more attractive. This strategy is often adopted by controversial industries like tobacco manufacturing, but is also prevalent in other industries today.

To that end, I’ve unearthed a small-cap dividend share of a company that’s always in high demand for at least half the year.

Keeping the nation toasty

Stelrad Group (LSE:SRAD) is a stock with a great dividend yield and decent growth potential.

As a manufacturer and distributor of radiators for the UK and Europe, its likely to enjoy high demand for the indefinite future. Even when taking into account the impending threat of climate change, I can’t imagine homes in the northern hemisphere will stop using radiators any time soon.

In the company’s August 2023 earnings report CEO Trevor Harvey discussed plans to increase energy efficiency and reduce emissions. This is critical for the firm’s future, as decarbonisation efforts may require it to meet stricter requirements.

Despite a slight decrease in revenue and sales, the report revealed a pre-tax profit increase of £5.6m. Overall, the CEO appeared confident about the figures, stating they were in line with expectations.

Financials

The Stelrad share price currently sits at 112p, down from 219p since its FTSE listing just over two years ago. Despite the 50% loss in share value, earnings grew by almost 80% over the past year and are estimated to continue rising at 23% per year.

While Stelrad offers a good 7% dividend yield, that’s only part of the story. With the recent fall in share price, the company is now estimated to be trading at only two-thirds of fair value. This suggest potential for growth.

Analysts agree — on average, they predict the share price could rise by as much as 50% in the coming 12 months.

So what’s the catch?

Stelrad only recently listed (late 2021) so there’s limited information about its past performance. This can make it more difficult to evaluate risks.

However, one clear thing is the company’s debt level.

With £90m of debt and only £50m in shareholder equity, Stelrad’s debt-to-equity (D/E) ratio (178%) is concerning. When this metric is higher than 100%, there’s an increased risk that the company could struggle to pay its loans.

Still, the value of Stelrad’s short-term assets are reportedly higher than its liabilities. This means it should be able to sell assets to cover costs if a serious issue arises. Debt is always a key risk to examine closely when evaluating a company. 

Other than that, it has mild growth potential and an estimated future return on equity (ROE) of 31%.

Altogether, I think Stelrad has potential as a reliable penny stock. Although it only recently listed, the company is well-established in the UK and its IPO went well.

With a decent yield and shares currently selling cheap, I’m putting Stelrad on my radar as a potential future addition to a dividend portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Mark Hartley has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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