Despite being tiny businesses, there are a few penny shares in the UK stock market offering some pretty generous dividend yields. In fact, as of today, there are 23 penny stocks paying out a 6% dividend yield or more, several of which also offer strong growth potential as well. And among these stands Topps Tiles (LSE:TPT).
A golden income opportunity?
With a market-cap of £85m, Topps Tiles is the largest pure-play specialist tile and flooring retailer in the UK. Yet in recent years, the business has been struggling through some pretty tough market conditions.
With interest rates rapidly rising, activity within the home building and renovation markets slowed considerably. And with it, so did demand for the group’s flagship products. The result has been a pretty painful multi-year decline that dragged the company into penny share territory.
However, recently, things might be starting to change. Over the last 12 months, Topps Tiles shares have climbed by over 20%, driven by a combination of factors, including emerging benefits from self-help initiatives as well as a wider market recovery within the home renovation space.
Looking at the latest trading update, like-for-like sales are back on the rise, along with a strong rebound in pre-tax profits courtesy of steadily expanding profit margins. More encouragingly, this growth appears to be faster than the group’s wider end-markets – an early indicator that Topps Tiles is taking market share away from its competitors.
What’s more, thanks to this jump in profits, dividends are once again covered by earnings, making its 6.8% yield look increasingly attractive. So with both a chunky income and recovery opportunity seemingly on the table, is investing in Topps Tiles a no-brainer?
Risk versus reward
Management’s operational turnaround alongside a wider market recovery is quite encouraging. However, it’s important to highlight that there’s still a long road ahead and Topps Tiles remains somewhat vulnerable.
With the group’s earnings per share for its 2025 fiscal year (ending in September) standing at 3.05p and dividends per share at 2.9p, the payout ratio’s an alarming 95%.
In the long run, this may ultimately not matter. After all, if market conditions continue to improve alongside margins, higher earnings will organically reduce the payout ratio to more sustainable levels.
But if there’s any sudden shock or disruption that interrupts the firm’s recovery progress, management may be forced to put dividends on the chopping block – something that’s happened multiple times.
The bottom line
Overall, Topps Tiles appears to be in a much stronger position compared to the last few years. Demand’s steadily recovering, and providing no surprise spanners are thrown into the works, the penny share’s impressive dividend yield looks quite tempting.
There’s no denying that there remains a high level of risk. But that might be a risk worth considering for some investors in a diversified portfolio. And it’s not the only promising penny stock opportunity I’ve spotted this week.
