Cheap Stocks With Dividends

A smart way for investors to grow their income is through cheap stocks with dividends.

Let's take a look at some of the best dividend stocks on the market today that are low-cost, as well as important fundamentals for dividend investors.

Some 2023 Options

Looking at the stock market in 2023, here is a list of stocks under $10 that offer dividends:
- Principal Real Estate Income Fund (NYSE: PGZ)
- Bank of the James (Nasdaq: BOTj)
- Gap (NYSE: GPS)
- Oxford Lane Capital Corp (NASDAQ: OXLC)
- Sirius XM Holdings (Nasdaq: SIRI)
- Redwood Trust (NYSE: RWT).

As of mid-2023, some of these stocks are under $5, which represents a potential bargain for investors.

Benefits of Cheap Stocks With Dividends

Investing in cheap stocks with dividends can offer several potential benefits. Here are some advantages to consider:

  • Dividend Income: Dividend-paying stocks provide regular income to investors. By investing in stocks with dividends, you can receive a portion of the company's profits in the form of cash dividends. This income can be particularly attractive for investors seeking current income or those looking to supplement their existing cash flow.

  • Potential for Growth: Cheap stocks have the potential for significant price appreciation, especially if the company performs well and the market recognizes its value. If you invest in undervalued stocks with dividends, you have the opportunity to benefit from both dividend income and capital appreciation as the stock price increases over time.

  • Dividend Stability: Companies that pay dividends tend to be more established and financially stable. They often have a history of generating consistent earnings and cash flows. By investing in cheap stocks that consistently pay dividends, you may benefit from the stability and reliability of these dividend payments, which can provide some level of income predictability.

  • Compounding Effect: Reinvesting dividends can have a compounding effect on your overall investment returns. By using dividend payments to purchase additional shares of the stock, you can increase your ownership in the company and potentially earn more dividends in the future. Over time, this compounding effect can significantly enhance the total return on your investment.

  • Defensive Qualities: Cheap stocks with dividends can exhibit defensive qualities during market downturns. Dividend payments can act as a cushion for investors when stock prices decline, potentially reducing the overall impact of market volatility on your investment portfolio. Dividends can provide a stable income stream and help offset potential capital losses during challenging market conditions.

  • Value Investing Opportunities: Cheap stocks often present value investing opportunities. Value investors look for stocks that they believe are trading below their intrinsic value, providing potential for future price appreciation. Dividends can be an additional factor that attracts value investors, as dividend payments can help compensate for the waiting period until the stock's value is recognized by the market.

It's important to note that investing in cheap stocks with dividends also carries risks. The stock's low price may be a reflection of underlying issues, and dividend payments are not guaranteed and can be reduced or eliminated by the company. It's crucial to conduct thorough research on the company's financial health, dividend history, and growth prospects before investing. Diversification and a long-term investment approach are also recommended to mitigate risk. Consulting with a financial advisor can provide personalized guidance based on your specific investment goals and risk tolerance.

Photo by Maxim Hopman / Unsplash

Disadvantages of a Dividend Investing Strategy

While investing in cheap stocks with dividends can offer potential benefits, it's important to consider the disadvantages and risks involved. Here are some key drawbacks to keep in mind:

  • Higher Risk: Cheap stocks often carry higher risks compared to more expensive stocks. The low price may be an indication of underlying issues with the company, such as financial distress, poor management, or declining business prospects. Investing in cheap stocks requires careful analysis to ensure you are not simply buying into a troubled company.

  • Dividend Cuts or Suspensions: Dividend payments are not guaranteed and can be cut or suspended by the company at any time. Cheap stocks may have higher dividend yield percentages due to market skepticism or perceived risk. However, these elevated yields can be a warning sign that the company's financial health is deteriorating, and it may not be sustainable in the long run. A company facing financial challenges may need to reduce or eliminate its dividend to preserve capital or address other pressing needs.

  • Limited Growth Potential: Cheap stocks may have limited growth potential. Some companies with low stock prices may be struggling to compete in their industry or face significant challenges to their growth prospects. Investing solely based on the dividend yield without considering the company's overall growth potential could result in missed opportunities for capital appreciation.

  • Lack of Market Interest: Low-priced stocks may suffer from limited market interest and liquidity. They may be less attractive to institutional investors and may not receive as much attention or analyst coverage compared to higher-priced stocks. This lack of market interest can result in wider bid-ask spreads and difficulty in buying or selling shares at desired prices.

  • Higher Volatility: Cheap stocks can be more volatile, experiencing larger price swings compared to higher-priced stocks. This volatility can create uncertainty and may lead to increased fluctuations in your investment value. It's important to be prepared for the potential ups and downs of cheap stocks and have a long-term investment horizon to ride out the volatility.

  • Lack of Quality: Some cheap stocks may be cheap for a reason. They may have fundamental weaknesses, poor financials, or lack competitive advantages. Investing in low-quality stocks with dividends could expose you to a higher risk of permanent capital loss if the company's financial condition deteriorates or if the dividend is reduced or eliminated.

It's crucial to conduct thorough research, evaluate the company's financial health, dividend sustainability, and growth prospects, and consider your risk tolerance before investing in cheap stocks with dividends. Diversification, careful stock selection, and a long-term perspective are important factors to mitigate risks associated with investing in lower-priced stocks. Consulting with a financial advisor can provide personalized guidance based on your specific investment goals and risk tolerance.