Penny stocks are not normally known for their dividends. More often than not, small-cap firms plough every spare penny back into growth or exploration, leaving little left over for shareholders. And when a penny stock does yield highly, it often says more about the share price collapse than the underlying business.
But while trawling through the London market for undervalued shares to add to my passive income portfolio, I may have stumbled across something interesting: Pharos Energy (LSE: PHAR). This tiny oil explorer could be one of the rare penny stocks that combines both income and value.
An up-and-coming miner
Pharos Energy has operations stretching across the Far East, Southeast Asia, the Middle East and North Africa. Its current focus is drilling offshore Vietnam and in Yemen, where it is working on both established and exploratory oilfields.
With a market capitalisation of just £88.13m and a share price of around 20p, it sits firmly in penny stock territory.
The share price has been volatile, falling around 20% in 2025 so far. Yet zooming out, it is still up 51% over the past five years. That track record makes it a more resilient story than many penny stocks, which often drift downwards and never recover.
Recent developments suggest there is life in the tank. In December 2024, Pharos received a five-year extension from the Vietnamese government to continue developing the Te Giac Trang (TGT) and Ca Ngu Vang (CNV) oil fields.
That provides some welcome security and clarity around future production.
Still, investors should be cautious. The oil industry is inherently cyclical, while political instability and foreign exchange risks in emerging markets can impact profitability. Liquidity is another challenge, as penny stocks can be harder to trade than well-established FTSE 100 names.
Dividends and value
The recent share price dip has had two intriguing side effects: it has boosted the dividend yield and left the valuation looking unusually attractive.
Today, Pharos offers a dividend yield of 5.6%, well above the FTSE average. Meanwhile, the stock trades at a price-to-earnings (P/E) ratio of just 4.8 and a price-to-book (P/B) ratio of 0.38. Those numbers suggest deep value.
Unlike many penny stocks, Pharos is fairly profitable too. Last year, it generated £106.4m in revenue and turned £18.47m of that into profit, giving it a net margin of 17.3% – its highest in over five years. Meanwhile, return on equity (ROE) sits at a respectable 8.3%.
Worth considering?
Pharos Energy looks like a rare breed: a penny stock that pays dividends, generates profits and has a promising five-year roadmap. The risks are real, but so is the growth potential.
The balance sheet looks sturdy as well. Assets total £341m, with operating cash flow of £40m. Most importantly, the company has virtually eliminated debt, cutting borrowings from £62.3m in 2022 to just £159,000 today.
For income investors willing to look beyond the mega-caps, this emerging energy play is worth considering as an intriguing addition to a diversified portfolio. If production growth continues and oil prices remain supportive, this little penny stock may prove to be more than just loose change.
