I hold some penny shares in my portfolio but am always willing to consider more. Rather than focus just on cost, I am looking for value. That means businesses with some sort of competitive advantage I think can remain profitable in future. Here are three such shares I would consider buying for my portfolio – and each of them pays a dividend!
Vertu Motors
Car dealership group Vertu Motors owns a portfolio of well-known local names such as Bristol Street Motors and Macklin Motors. That lets it combine the strength of local familiarity with exclusive dealership agreements for certain areas. I think that is a recipe for success as long as demand for vehicles among buyers remains buoyant.
The current dividend yield is only 1%. And profit margins in this industry are razor thin, so there is always the risk that increased costs for second hand vehicles could hurt profits. But I reckon a decade from now, the car dealership model will remain successful and Vertu is well-positioned to benefit from that. I would consider adding these penny shares to my portfolio.
Lloyds
It always strikes me as a bit odd that Lloyds (LSE: LLOY) sits among the ranks of penny shares. The bank has a market capitalisation well north of £30bn and last year reported profits after tax of £5.9bn.
Despite that, the bank’s shares continue to trade in pennies. In part I think that reflects the concerns of investors burned by the long-term value destruction in Lloyds shares before and during the last financial crisis. There is a risk that could happen again, for example if a cooling economy pushes more borrowers to stop repaying their loans.
But the bank has huge potential too. It is the biggest mortgage lender in the country and has a massive customer base. That helps explains its profitability, which supports a dividend yield of 4.2%. The price-to-earnings ratio of under seven also looks cheap to me. I continue to hold Lloyds in my portfolio.
Photo-Me
Another mystery to me is why the market continues to value vending machine specialist Photo-Me (LSE: PHTM) below the price of a recent unsuccessful bid for the company. That bid was spearheaded by the chief executive, who I think should have a clear sense of the company’s business prospects and intrinsic value.
Photo booths have turned out to be more resilient than some watchers expected amid the rise of digital photography for identity and travel documents. The company has been using its expertise in outdoor and public space automated vending to expand in areas from launderettes to fresh juice machines. Such businesses often offer convenience for which customers are willing to pay, underpinning an appealing business model.
Penny shares with more dividend potential
I think there is a lot of white space for Photo-Me to grow into, both in terms of geographic markets and business areas in which the automated vending model could work.
It has brought the dividend back after making a £22m post-tax profit last year and currently yields 4%. I see the potential for future dividend increases – the current level is little more than a third of what it was before the pandemic hurt business. I would consider buying it for my portfolio.