Significance

• Without significant knowledge about a particular penny stock company, holding on to such a stock in large amounts for an extended period of time can be risky. If you plan to invest in penny stocks for dividends, make sure that you are well appraised of the company's ex-date--the date at which you need to be holding a stock to qualify for the dividend. Try to time your sales--if you plan to sell--after the ex-date passes so that you can make sure that you don't miss out on your dividend.
  
  

Function

• Never buy into a stock--penny or otherwise--just to collect the dividend on a one-time basis. When a stock goes ex-dividend, the stock price almost inevitably drops by the same amount as the dividend itself. This makes selling immediately after the ex-date a complete wash, as the value of the shares will decrease in the same amount as the dividend actually pays out. To actually profit, you must wait for the stock to increase again over the dividend level; otherwise, waiting for the dividend is pointless.
  
  

Features

• Penny stocks can be good dividend plays because they are so cheap. It's easy to buy tons of their shares, and their prices can go up and down. So long as you can be reasonably well assured that the company will continue to survive while you hold the stock, you can expect the dividend to continue paying out. Despite this, penny stocks are often more vulnerable to broad market moves than larger ones are. This can lead many penny stock companies to cut their dividends more often, making it an insecure investment at best for people looking for passive income.
  
  

Effects

• Look for penny stocks that offer high yields, but most importantly, you want to look for stocks that have given out consistent dividends over the years without any interruptions. Companies that have consistent profits are dividend mines--you wan to look for stable companies--middle-men, parts suppliers, for example, many of which provide critical services to larger companies. There are plenty of stable dividend-bearing penny stocks, but you must avoid the flash-in-the-pan companies when you are hunting for dividend deals.
  
  

Considerations

• Typically, dividend investors are more passive. They are not looking to make substantial amounts of money on movements in stock price--they want to see stable income year after year largely regardless of price. A typical dividend investor reacts with glee when he hears that a company has reduced its stock price--it's an opportunity to buy more shares. However, when a company starts running into trouble with profits, one of the first things that it tends to cut is the dividend. Stick with stable small-cap stocks to prevent this from happening to you.