We recently compiled a list of the 12 Best Dividend Penny Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where Enel Chile S.A. (NYSE:ENIC) stands against the other dividend penny stocks.

For investors who look for potential for quick gains at a low investment price point, penny stocks can be an attractive but risky stock investment option. Stocks that typically trade under $5 fall under this category, but they can go as low as $1 in some cases. While many of these stocks are a red flag for high volatility, dividend penny stocks offer some security to investors as they balance the risk with some stability and income. They provide the added benefit of a regular income. Investors with high-risk tolerance often seek these stocks to enter high-potential markets. For those seeking to grow their portfolios without taking great levels of risk, dividend-paying penny stocks can be an interesting opportunity.

Often when prices spike in the market, the low-priced shares offer the opportunity to make attractive gains as they allow investors to hold a large number of shares for a small amount of capital. However, these shares also belong to companies that are often under-the-radar with the risk of prices sometimes even falling to zero. They are often considered stocks lacking liquidity and are highly speculative due to small market capitalization. Given their speculative nature, it is recommended to conduct thorough research before investing in penny stocks.

Unlike blue-chip companies trading on major stock exchanges, many penny stocks trade over-the-counter (OTC) or through Pink Sheets where listing requirements are more relaxed. With low levels of information available, these stocks are also susceptible to pump-and-dump schemes. Even though dividend penny stocks pay out dividends, they are not entirely free of the inherent risks and may wind up cutting dividends as a first line of defense when the market goes awry. The majority of these companies are either in their early growth stage or are companies facing financial difficulties. Many of these companies fail to perform or go bankrupt, leading to substantial losses for investors.

Investing in dividend penny stocks also requires a thorough understanding of financials and carefully selecting a portfolio. Investors should look out for a history of regular dividends and a reasonable dividend yield.

In a broader market context, penny stocks tend to underperform large-cap in the longer term due to their inherent financial risks and instability. Less than 10% of penny stocks graduate to higher stock data, while some end up getting delisted. However, there are instances of penny stocks performing outstandingly and transitioning into mid-cap and even large-cap stocks. While over 90% of OTC penny stocks underperform over five years, it was noted that small-cap stocks that pay dividends out-perform their non-dividend paying counterparts by over 2-3% annually. This might not seem significant, but these figures provide some context in a highly speculative market with less transparency.