How Would You Like a Dividend Yield of 7.4% from a Penny Stock?

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How Would You Like a Dividend Yield of 7.4% from a Penny Stock?

With the current interest rate environment as low as it is, there is greater emphasis on obtaining a dividend yield from stocks. Many investors believe large-cap companies that have minimal capital appreciation possibilities are the only way to obtain a good dividend yield. I would suggest that while, for the most part, that’s true, there are some penny stocks, including biotech companies, which have a good dividend yield with a potential for significant capital appreciation.

A company that I brought to the attention of my readers back at the beginning of August is PDL BioPharma, Inc. (NASDAQ/PDLI). While many biotech companies are extremely risky in that they are in the business of developing drugs, PDL is unique in that it doesn’t actually create any new drugs, but simply collects royalties on the patents and pays out a strong dividend yield.

Because this firm doesn’t invent new drugs, one shouldn’t expect explosive growth in the share price.

However, because of the stability of the royalty pipeline, share price appreciation continues to be stable and strong, with the company also offering a healthy dividend yield. When I first wrote about PDL, the share price was $6.95. Since that time just over two months ago, the stock has gone up 20%. This is on top of a dividend yield of 7.4%.

Chart courtesy of www.StockCharts.com

While some biotech companies have struggled, PDL is not one of them. Perhaps some of the readers have profited from the strong move this year since I talked about the stock; however, it appears that the stock is slightly overbought. Note the RSI is clearly in overbought territory. This does not mean the stock will crash, but a pause is due to occur.

Some of the current fundamentals still appear very strong. The stock trades at a forward price-to-earnings ratio of only 4.77 and, as I mentioned before, a dividend yield of 7.4%. Considering what you might obtain from Treasury Notes, this dividend yield is extremely attractive.

One major caveat is that the company will have a significant number of patents coming off-line. For biotech companies such as this that rely on royalties, without patents, there won’t be any revenue and, therefore, no dividend yield. The company is currently looking at signing new deals to accumulate new patents and replace the ones that will be expiring. Considering this patent cliff, I would certainly encourage profit-taking, as 2014 will be the year that most of their patents expire.

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