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Penny stocks are not a traditional asset class for investors looking for passive income.
These small-cap companies are usually young companies with limited financial resources. Also, as they are at the beginning of their life cycle, they tend to reinvest surplus cash to drive growth. Dividends are a very little considered factor.
However, there are exceptions to this rule, some of which are shown in the following table.
| Company | Future dividend yield |
|---|---|
| HSS Rental Group (LSE:HSS) | 7.8% |
| Topps Tiles (LSE: TPT) | 7.2% |
| Anglo-Asian Mining (LSE:AAZ) | 4.1% |
Of course, dividends are never guaranteed, but if the brokers' projections are correct, a lump sum of £20,000 invested equally in these penny stocks would earn me a passive income of £1,280 this year alone.
There's also a good chance that they could increase their dividends over time, which is why I think they're worth a closer look today.
HSS Rental Group
Construction companies around the world are changing the way they operate. Instead of purchasing their own heavy equipment, many are choosing to rent it in increasing quantities.
The advantages are numerous: large initial costs are avoided, there are no worries about storage or maintenance costs, and the equipment can be better adapted to specific projects. It is a trend that should benefit companies like HSS in the future.
This operator is expanding rapidly to take advantage of this trend as well. Last year it opened 29 new retail units for construction, bringing the total to 89. I think it could be a great buy despite the current weakness of the UK economy.
Topps Tiles
Like HSS Group, building materials supplier Topps Tiles is also vulnerable to a weak construction sector. It also faces significant competition from companies such as Kingfisher-owned by B&Q and Travis Perkins.
But I still think that gains could rise given the good outlook for UK housebuilding over the next decade. Britain needs to accelerate residential construction to meet the needs of its growing population. Indeed, Labour, favourite to win this week's general election, has promised to build 1.5 million homes over the next five years.
This could support large and growing dividends from Topps Tiles for years to come.
Anglo-Asian Mining
Copper miner Anglo Asian Mining hasn't had the best of times lately. Production has fallen sharply as it awaits regulatory approval for some of its operations. More specifically, it is seeking the green light to erect a tailings dam wall.
The company is not out of the woods yet, but last month it received a positive environmental report from the Azerbaijani government to carry out its work. Now might be the time to buy a stake in the company.
Copper mining companies like this one have excellent long-term investment potential. Their product is widely used in fast-growing sectors such as renewable energy, IT, electric vehicles and construction. And with supply tight, many industry experts expect prices for the red metal to soar.
