Investing in penny stocks carries significantly more risk than buying large- and-mid-cap UK shares. But with that added danger comes the chance to make supersized returns.
Needless to say, it’s critical that investors do proper detailed research to separate the duds from the true investment opportunities. But there’s another important thing to consider: buying penny shares that are trading ‘on the cheap.’
Underpriced companies can avoid the price volatility that’s a common problem for small-cap companies. What’s more, a low valuation can stop a penny stock from plummeting if news on the company, industry, or the broader economy rattles investor nerves.
With this in mind, here are two dirt-cheap penny stocks I’m thinking about buying this month.
Getting back on Topp
The risks facing Topps Tiles (LSE:TPT) have risen since the start of the Iran war. Rising inflation and its potential effects on interest rates could prompt a fresh housing market downturn. It’s a combination that could also dent sales to cash-strapped DIY enthusiasts.
In this climate, demand for its tiles and other product lines might come under pressure. But is this baked into the firm’s low valuation? With a forward price-to-earnings (P/E) ratio of just 7.2 times, I think it could be.
The long-term potential at Topps Tiles is considerable in my view. Britain’s fast-growing population should lead to increased newbuild rates over the next decade. In addition, the UK’s existing housing stock is extremely old, which I’m expecting to support demand from the repair, maintenance, and improvement (RMI) sector.
Encouragingly, Topps is investing heavily in its digital capabilities and product ranges to capitalise on these opportunities.
Big dividends
Penny stocks aren’t renowned for their high dividend yields. Typically, these small-cap shares are growth-focused companies that plough any extra cash into their operations. Real estate investment trust Alternative Income REIT (LSE:AIRE) is one brilliant exception to this rule.
As its name suggests, it’s designed to deliver dividends to its shareholders. In exchange for tax breaks, REITs like this must distribute at least 90% of their rental earnings to shareholders each year.
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This doesn’t guarantee a healthy dividend each year, mind. What if Alternative Income struggles to collect rents, or its properties become empty? Fortunately the trust’s diversified portfolio helps reduce this danger. It has 20 properties on its books, ranging from care homes to power stations, and retail parks to gyms.
The REIT also has tenants locked down on long-term contracts. This gives it the strength and the confidence to pay market-beating dividends year after year. As of December, its weighted average unexpired lease term (WAULT) to expiry was a robust 17.1 years.
For this financial year (to June 2026), Alternative Income REIT sports an enormous 7.6% dividend yield. Its shares also trade at a 13% discount to the trust’s net asset value (NAV) per share. For value investors seeking top penny stocks, I think these numbers are hard to ignore.
