A number of buyers like the concept that shopping for a penny share may generally imply paying pennies for one thing that seems to be value much more in future.

However penny shares could be probably profitable in different methods too. Some pay substantial dividends. For instance, one I personal yields over 8%. I like that passive revenue and plan to maintain holding the share – however will the payout proceed?

Robust market place

The dividend in query has not but despatched me up the wall, however what goes up partitions is one thing this firm is aware of a good bit about.

As the vendor of 1 in 5 family tiles used throughout the nation, Topps Tiles (LSE: TPT) has a powerful place out there. After it purchased belongings from a competitor that entered liquidation this summer time, I feel it might be much more competitively positioned.

Over the long run, I anticipate demand for tiles to be pretty resilient. New homes are being constructed and previous ones refurbished.

Nonetheless, that doesn’t imply Topps is resistant to the housing cycle. Certainly, this is among the key dangers I see with this penny share. After reporting a report when it comes to income for its most up-to-date full 12 months, the group introduced this month that its 2024 gross sales revenues are more likely to be round 6% decrease than the earlier 12 months.

The corporate described the buying and selling surroundings as “very challenging across the whole year”. I feel that might proceed to be the case.

Sustaining the dividend might be difficult

Final 12 months, the corporate’s dividend was not coated by fundamental earnings. On the interim stage this 12 months, the dividend was held flat. Once more it was not coated. Adjusted earnings per share of 1p didn’t cowl the 1.2p payout. And on the fundamental earnings degree, the image was even worse, with a lack of 1.1p per share.

As a part of its interim report, the board outlined a number of contingencies it has thought-about within the occasion of “a severe but plausible trading scenario”. Amongst others, it thought-about suspending the dividend.

For now, I don’t assume the corporate’s buying and selling deserves a “severe” label. I additionally assume the board shall be eager to keep up the dividend if it probably can. And adjusted web money of £19m on the finish of the primary half offers it some monetary cushion.

The excessive yield helps assist it, for my part. If the dividend is minimize, not to mention axed altogether, I feel the share price may tumble.

Why I nonetheless just like the funding case

Nonetheless, the latest earnings image has not been encouraging. The buying and selling surroundings stays troublesome. Except issues enhance markedly, I see an actual threat that the dividend is not going to be sustained at its present degree in coming years.

As a long-term investor although, I proceed to love Topps’ sturdy place in a market that will see uneven however nonetheless ongoing demand. I’ve no plans to promote the penny share.