This article looks at the 12 best dividend penny stocks to buy according to hedge funds.
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.
A money manager reviewing quantitative and fundamental analysis before investing in a public company.
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).
12. Enel Chile S.A. (NYSE:ENIC)
Stock Price: $3.38
Number of hedge fund holders: 9
Enel Chile S.A. (NYSE:ENIC) is a leading player in Chile’s energy sector, specializing in the generation, transmission, and distribution of electric energy. As a subsidiary of the multinational Enel Group, the company operates a diversified energy portfolio that includes hydroelectric, solar, wind, thermal, and geothermal power plants.
The Board of Directors of Enel Chile S.A. (NYSE:ENIC) has declared an interim dividend for the 2024 fiscal period, representing 15% of the net income as of September 30, 2024. This interim dividend underscores the company’s commitment to delivering consistent shareholder value. Financially, the company has struggled with revenues decreasing 11.63% from the previous year leading to a net income reduction of 49.41%. Extreme weather conditions in the Chile region have also contributed to significant financial disruptions for the company by affecting infrastructure and operations. To future-proof its operations against climate-related disruptions, Enel Chile has expressed intentions to invest in grid resilience.
A strong commitment to counter economic and climate challenges projects a positive outlook for Enel Chile S.A. (NYSE:ENIC) increasing investor interest. This is coupled with an attractive dividend yield offered by the company. The company’s forward dividend yield stands at 6.46%, with an annual dividend of $0.22 per share. Notably, over the past three years, the company has achieved an impressive annualized dividend growth rate of 143.29%. This robust dividend performance has garnered attention from hedge funds and institutional investors seeking reliable income streams from penny stocks. The global shift towards sustainable energy solutions presents it with opportunities to expand its renewable energy footprint, aligning with both national and international energy transition goals. The company’s entry into sustainable offerings also presents an appealing opportunity for investors to tap into the growing industry. As a market leader, Enel Chile S.A. (NYSE:ENIC) is in a good position to navigate the evolving energy landscape effectively, ensuring long-term value creation for its shareholders.
11. 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.
10. Orion Office REIT Inc. (NYSE:ONL)
Stock Price: $4.12
Number of hedge fund holders: 14
Orion Office REIT Inc. (NYSE:ONL) is an internally managed real estate investment trust. The company specializes in the ownership, acquisition, and management of a diversified portfolio of mission-critical and corporate headquarters office buildings. With a focus on high-quality suburban markets across the United States, the company leases primarily to single tenants on a net lease basis. The company’s portfolio comprises 76 properties, with approximately 74.4% of annual base rent derived from investment-grade credit-rated tenants. ONL is one of the best penny stocks on our list.
Orion Office REIT Inc. (NYSE:ONL) reported significant leasing activity in the Q3 of 2024, completing 832,000 square feet year-to-date, with 254,000 square feet completed during the quarter. The company expanded its strategic market presence by acquiring a 97,000-square-foot property in San Ramon, California, for $34.6 million. Despite the strategic moves, the company faced a challenging financial environment with revenue declining to $39.2 million from $49.1 million year-over-year, and Core Funds From Operations (FFO) decreasing to $12.0 million ($0.21 per share) from $24.1 million ($0.43 per share) in the same period.
Orion Office REIT Inc. (NYSE:ONL) maintains a strong dividend yield, appealing to income-focused investors. The forward dividend yield stands at approximately 9.93% as of February 21st, 2025. The company’s payout ratio is a conservative 40%, indicating that dividends are well-covered by earnings.
The office REIT sector is facing financial headwinds due to evolving workplace dynamics and economic uncertainties. To navigate these industry challenges, Orion Office REIT Inc. (NYSE:ONL) has shifted its strategic focus to suburban markets and investment-grade tenant positions. Recently the company has secured a long-term lease renewal with GE Vernova indicating its capabilities to acquire high-quality tenants and enhance portfolio stability.
Overall, Orion Office REIT Inc. (NYSE:ONL) offers a good opportunity for investors to tap into the attractive office REIT market with a steady share in the rent income. The company has also proved its resilience over time by acquiring creditworthy tenants in suburban locations and undertaking proactive leasing strategies against the changing office space demands.
