Penny stocks are shares that trade for pence not pounds. Despite their low prices, some offer a chance to buy into a large and successful business. Here are three UK penny stocks I would consider buying for my ISA today.
High street bank
Penny stocks aren’t necessarily obscure names with small capitalisations. One of my favourite UK penny stocks is a financial powerhouse with a market cap of £33bn.
Banking group Lloyds (LSE: LLOY) is so well-known it needs little introduction. The company owns brands including Bank of Scotland and Halifax, as well as its eponymous Lloyds fascia. Its shares have traded in pennies since 2008, when they were badly hit by the financial crisis. But lately the Lloyds share price has been increasing, adding 45% in the past year.
The bank has a well-established, widespread business with strong customer awareness. It is the largest mortgage lender in the UK. Even during the pandemic it turned a profit, albeit much reduced. It has restarted its dividend and has sufficient capital to pay a special dividend in future should it decide to do so.
I think the bank is a good proxy for the British economy at large, particularly the housing market. I am happy holding it in my ISA. However, its dependence on the UK economy could be a problem in a recession. And its heavy exposure to mortgage lending does point to a key issue. Any downturn in the housing market risks rising default levels among borrowers. That would likely reduce Lloyds’ profits.
UK penny stocks yielding over 6%
Income and Growth Trust (LSE: IGV) is a fund that tries to achieve capital growth while paying out dividends. It does that by investing in companies in their early stages that it thinks have strong growth potential. It tends to spread its bets quite widely, which mean that if some investments are duds, the overall impact on the trust is limited.
Sometimes IGV pays special dividends. Last year, for example, it paid out bumper dividends of 14p. Given its current share price of 91p, that is a sizeable payout. In other years the dividend is not as big. But even the smallest dividend in recent years – 6p – would equate to a yield of around 6.6% at the current IGV share price.
Dividends are never guaranteed, of course. One risk I see in IGV is the relatively illiquid nature of some of its holdings, which can make the share hard to value accurately.
Medical-focused property developer
I’d also consider Assura (LSE: AGR) on the list of UK penny stocks for my ISA.
Assura is a property developer. It focuses on properties for medical use, such as doctors’ surgeries and primary care buildings. Over the coming decades, I expect demand for such buildings to be relatively strong and foreseeable. Tenants such as health authorities and doctors’ practices are likely to pay their rent, even if the economy performs poorly, in my view.
With growth potential and a current dividend yield of 3.6%, I think Assura could fit well into my ISA. But one risk is the UK government’s willingness to suspend landlords’ rights. As seen during the pandemic, this can lead to long delays in collecting rent from even deep-pocketed tenants. That could hurt the cash flow of a landlord like Assura.
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Christopher Ruane owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. 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.