Investors with a few quid to spare and an appetite for some passive income might find these two penny stocks interesting. Both have higher-than-average dividend yields and are heading towards £1 a share.
That means they may not be such a cheap deal come next year. But as always with income shares, the true test is in the sustainability.
Do they have what it takes to keep paying dividends in the long run? Let’s have a look.
Nexteq
Nexteq (LSE: NXQ) currently boasts a decent 4.7% yield with a payout ratio near 24%, indicating a sustainable dividend policy that’s well-covered by earnings. The price is down 20% in the past five years but has recovered 17% in just the past year alone.
The Cambridge-based technology solutions company reported a 7.8% slump in profits in its latest results, due to challenging market conditions. But CEO Duncan Faithfull lived up to his name, voicing confidence in the company’s long-term prospects due to high customer retention, ongoing innovation, and expansion into high-growth segments like gaming electronics.
Despite the recent revenue declines, the share price is up 36% this year. This growth is backed by a strong cash position and a low debt-to-equity ratio — both factors that help support dividend sustainability.
However, the earnings dip means the current price looks a bit overvalued. That would be my only concern, as it risks a mild price correction in the short term. Still, as far as cheap income stocks go, I think it’s worth considering.
Michelmersh Brick Holdings
Michelmersh Brick Holdings (LSE: MBH) is often viewed as a relatively defensive stock, focused on steady dividend payments and long-term sustainability. The brick manufacturer’s recent interim dividend of 1.6p is equal to last year’s, reflecting confidence in its cash flow despite some profit pressures.
Its payout ratio’s a bit high, at 80%, meaning it only retains 20% of profits to fund operations. But with an 11-year track record of uninterrupted payments, it certainly seems dedicated to rewarding shareholders. Encouragingly, cash coverage is excellent and it looks undervalued, with a forward price-to-earnings (P/E) ratio of only 10.9.
The company maintains a disciplined capital allocation strategy, balancing dividends and share buybacks while investing in well-equipped manufacturing sites to support future growth. It has a strong balance sheet with zero debt and good liquidity, enhancing dividend sustainability even in market downturns.
Still, there’s always the risk that fluctuating energy costs drag down margins, pressuring profits. Plus, the UK construction sector is inherently volatile, which could limit growth.
But overall, it’s one of the more stable dividend-paying penny shares on the market, so one worth considering, in my book.
Balancing risk
Penny stocks are seldom seen as a safe investment but those that pay sustainable dividends add an element of reliability. Even if prices dip in the short term, the dividends shore up the investment until markets improve. And when the prices are as low as these two, it makes for a very tempting offer.
It’s not every day that reliable, high-yielding penny stocks come along. So I think there may be a very real, untapped opportunity here. But as always, investors should only consider them as part of a well-balanced and diversified portfolio.
