Penny Income Explained
By Jim Nelson
August 25, 2008
Awhile back, I wrote a report about "Penny Retirement Stocks." Basically, it detailed how you can collect income that will help you retire through dividend-paying penny stocks. Today, I'd like to dive back into that issue and give you a fresh look at income penny stocks.
First, let's break down exactly what I'm talking about… Penny stocks offer the largest potential of capital gains. I've said this before, but it's so true: It's much easier for a $50 million company to turn into a $100 million one, than it is for a $50 billion company to turn into a $100 billion one. But on top of capital gains like this, you can also enjoy the same benefits that the blue chips provide…namely, dividends. I'll show you how… ********************************** "Slow Volcano" Power Could Soon Light Every Streetlight in San Francisco... …Without Burning One Ounce of Coal, Oil or Gas California Senate bill 107 will legally force California to produce 20% of its electricity from sources like "Slow Volcano" Power by Dec. 31, 2010... Get in now, while it's still on the ground floor… ********************************** Turn $5K into $151,025.76 in Just Five Years The year was 2003. Fertilizer maker Terra Nitrogen Company (TNH: NYSE) paid a small dividend about 4-5% of its share price, which was only $4.40. Nothing to write home about. But, it was picking up steam. Just $5,000 would have bought you 1,136 shares. But starting the next year, the company took off. The demand for its products grew sky high, and so did the company's dividend plan. Those 1,136 shares would have been paid off through the company's dividends in just two and a half years. So you would have had free shares of a growing company that pays a tremendous dividend. But here's where the story gets good. Over the next two and a half years, the company absolutely soared. You would have received dividend checks totaling $20,686.56 with just a $5,000 initial investment a few years before. And it's still paying dividends to this day. On top of this, the company's share price skyrocketed. Shares of Terra Nitrogen went from trading at less than $5 to $110 today. That's a 2,400% capital gain, which is a complete bonus. After just $5,000 upfront five years ago, you'd be sitting on $151,025.76 right now: 
That's great, but how do you look for this kind of thing? Well, that's the hard part. Finding the Best Penny Income Plays One way to go about it is to start with a simple stock screen. A couple of key items to screen for would be dividend yields, dividend growth, cash flow, and debt. Here's how that works… Obviously, the company needs to pay a dividend for it to be an "income" play. While most people will tell you that you need to find high dividend yielding stocks, I disagree. The growth is the only thing that matters. I look for yields around 3%-6% — solid but not too large — and dividend growth over 5%-10% per year. This gives a strong dividend position. Second, you'll have to make sure the company is making enough to continue to payout dividends. If the company is just piling on debt to appease income investors, forget it. That's robbing Peter to pay Paul. You don't need that. That's why you have to look at the company's income and current debt levels. Once you narrow that search down, you can plug in any other criteria you might have, like a share price under $10 or a market cap under $1.5 billion — to make sure you are only looking at penny stocks. ********************************** Get Ridiculously Wealthy as Tiny Stocks Explode How you can turn just $200 into $1.2 million, or MORE! You could be getting rich with Scientifically Selected Penny Stocks. My CXS Money-Multiplier System finds enormous gains, and it's incredibly easy. I'll tell you when to buy and sell. The profits can be astounding. You'll kick yourself if you miss this chance! Check it out right here… ********************************** Once you find a few company's to look at, you'll need a checklist to determine if these companies are actually worth buying: - Does the company have plenty of cash on hand?
- Is the company's operating cash flow minus capital expenses sufficient for future dividend payments? (Three times current dividend is a safe bet.)
- Is the company's business safe from competition?
- Is the company's product or service recession proof?
- Would you be willing to sink an investment in this company and leave it for a few years?
If you answer yes to these questions, you might have found a winner… Lastly — and most importantly — you'll need to look at the company's future prospects. If a company isn't going to grow much more, or bring in any more income than it did in the past, there's no way it can grow its dividend without maxing out at some point. You must make sure the company and its industry are on track to continue to grow. Take the Terra Nitrogen example again… If you had predicted the ethanol boom coming, you would have been able to spot the need for fertilizer. After all, it takes a ton of fertilizer to grow corn. Foresight like that, even if it's just a few times, can leave an average investor with a large retirement account, along with big dividend checks for life. While we continue to scour the penny stock market, we'll keep you informed if any penny income plays pop up. That just might be your best bet to grow your retirement with just a few bucks… Sincerely,
Jim Nelson P.S.: If income is what you seek, you might want to check out the brand-new report Editor Chris Mayer just finished. He details a way for you to have up to 75 checks sent straight to your account. Read what Chris discovered here… P.P.S.: As always, you can send any questions or concerns to us at jim@pennysleuth.com. We aren't able to give individual advice, but we just might use your questions in future Penny Sleuth articles.
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