The penny stock. Risky, dangerous, and a bad investment. There’s even a whole movie, The Wolf Of Wall Street, based around this. But are penny stocks really a bad investment? No. Not if you know what you’re doing at least.
This article explains when and why penny stocks can be a great investment, and how to boost your passive income through these low-cost assets.
I’ll also share three potential ideas with you. This is obviously not financial advice, but it will give you an idea of the opportunities out there.
Why Most Penny Stocks Are Bad Investments
First off, the term “penny stock” just means you are buying into a company with low share prices (typically under $5 – $10). There are plenty of good, legitimate businesses trading in these affordable ranges.
We’re talking companies that have been around for decades, are profitable, and pay a steady dividend.
Of course, most investors skip these, aiming for high-risk penny growth stocks instead. These are random, no-name businesses that are worth absolutely nothing unless some one a in a million event happens. These are firms which generally don’t produce anything or turn a profit. Instead, they sell themselves on long-shot ideas like curing cancer or drilling for oil on the moon.
That said, there are also plenty of legitimate businesses with low-priced stocks. The mining sector and emerging markets are two perfect examples. Here’s a company called DDGOLD, to illustrate the point:
DRDGOLD was founded in 1895, and is a stable business with actual products (gold) and verifiable profits.
Would I buy this company right now? I don’t know, but it is a good example of the many inexpensive investment opportunities out there.
Why Some Penny Stocks Are Good Investments
Coca-Cola is a company everybody knows. If you asked 100 random people to name one safe stock investment, most of them would probably say “Coke.” The bad news? Coca-Cola has lagged the general stock market for over a decade. Why? Because every knows about coke and they all sink their money into it. As such, you’re paying a high share price for a lackluster business.
This isn’t unique to Coca-Cola either.
Many big-name stocks are overvalued and underperform. You’re paying a lot of money for a big brand everyone knows, and your return on investment suffers.
Smaller, lesser know businesses offer a higher return on investment. If one share of Coca-Cola sells for $50 but is actually worth $2 of company earnings, it takes 25 years to fully recuperate your money. However, if a profitable penny stock sells for $10 but has shares worth $1, you make all your money back in 10 years or less.
If this sounds complicated, I’m going to recommend two books right now. Read these before you do anything else, because they will help you immensely.
The first is One Up On Wall Street, by Peter Lynch. This is a book written by the greatest investor of all time (he even beat Warren Buffett’s returns) and covers just about everything you need to know in order to make money with stocks. The second book is 100 to 1 in the Stock Market, by Thomas Phelps. This is an old book all about finding low priced quality businesses (some suggestions include 3M and Pfizer), then investing for the long-term.
If you understand investing, here are some low-cost ideas for you.
Three Penny Stock Ideas For You
Rather than trying to pick out ideas that are exactly $5 or less, we’re looking at several companies you can invest in for under $15 per share. Additionally, many of these businesses have shot up a lot recently. And some were even available for $1 – $5 just a few months ago.
1. U.S. Global Investors, Inc.
This is a company I first heard about while reading The World Right Side Up (a fantastic investment book). U.S. Global Investors is an asset management company that invests into other stocks, commodities, and businesses. They own a popular ETF called JETS, as well as a mining fnd, and direct investments into crypto currencies.
In other words, you get a lot of value for your money. Or at least you did throughout most of 2020. During this time, GROW traded very cheaply. At one point, you could pick up shares for $0.84. Since then, the stock has exploded. In fact, the stock is up 280% in the last 12 months.
I don’t know if I would buy more at the current prices, but GROW is definitely worth a look if the share prices dip.
2. Companhia Paranaense de Energia
This is a utility company located in Brazil. The business, often referred to as COPEL, was founded in 1954 and has traded on the New York Stock Exchange for almost 25 years. This is a stable business that’s been around a long time. And, COPEL trades at a cheap valuation.
There’s also a 5% annual dividend yield, meaning you’re paid $5 cash for every $100 invested. I own shares in this business and will personally buy more due to the low valuations and high dividend payout.
3. Broadmark Realty Capital Inc.
This is a 10 year-old company that only went public in 2019. Broadmark Realty Capital loans money for building projects and also owns its own real estate. What’s great about this business is the fact that it has zero debt. As such, there’s really no risk of the business going bankrupt.
I loaded up on this stock during the crash of 2020, and have been handsomely rewarded.
The stock has recovered and plateaued since then, but does offer almost 8% in annual dividend payments. The high-yield mght make this a company worth investigating.
How To Build Passive Income Off Small Investments
I live in a beach town outside the US. My cost of living is very low, though my quality of life is fantastic. Every year I take a few thousand dollars and buy a handful of low-cost, established companies.
In 2020, I bought several hundred shares of Broadmark Realty Capital for less than $8 each. Today, those same shares yield over 12% annually off their dividend payments alone. If you can get 10 – 12% annual cash flow, you can retire comfortably on very little capital.
A portfolio of 150,000 – 250,000 could more than cover your expenses, if the yield is high.
Additionally, living overseas allows you to spot many fantastic investment opportunities Wall Street overlooks.
If you live in Vietnam, Thailand, Brazil, Poland, or other emerging markets; you can spot businesses that are far more rewarding than Colgate or Coca-Cola. And, you can build wealth much faster by doing so.