3 penny stocks with cheap valuations AND huge dividend yields!

Penny stocks are known for their often eye-poppingly-low valuations. This reflects challenges like thin balance sheets, unproven business models, and competition from larger rivals.

It also reflects the volatility that small-cap shares often experience.

What they’re less famous for, however, is the presence of high dividend yields. This simply reflects the fact that younger companies tend to prioritise any spare capital they have to investing for growth rather than paying shareholders cash rewards.

However, the following penny shares are the exception, offering an attractive blend of value and dividends. And today their dividend yields sail comfortably above the 3.6% average for FTSE 100 shares.

Here’s why I think they’re worth serious consideration today.

HSS Hire

With a forward price-to-earnings (P/E) ratio of 7.7 times and 9.8% dividend yield, HSS Hire (LSE:HSS) offers attractive all-round value. Its cheapness reflects tough economic conditions in its markets, and by extension an uncertain profits outlook.

The penny stock is a prominent supplier of tool and equipment hire services in the UK and Ireland. Despite its position as market leader, continued weakness in the construction sector poses obvious dangers to shareholder returns.

Yet, for patient investors, I believe HSS shares could eventually prove a shrewd buy. It has major structural opportunities to exploit, such as government plans to build 1.5m new homes between now and 2029, and the fast-tracking of 150 major infrastructure projects.

In the meantime, HSS is extensively cutting costs to help it ride out current market difficulties.

Topps Tiles

Tile retailer Topps Tiles (LSE:TPT) shares many of the same qualities and problems as HSS.

Near-term earnings are under threat from difficult conditions in end markets. On top of this, the sector in which this penny stock operates is highly competitive.

Yet, like the tool hire giant, it also has significant long-term structural opportunities as Britain gets building again. And as market leader, it’s in the box seat to exploit any market upturn (it has 20% of the tile market).

For this fiscal year (to September 2025), its shares trade on a forward P/E ratio of 8.9 times. They also carry a market-beating 8% dividend yield.

Alternative Income REIT

Alternative Income REIT (LSE:AIRE) isn’t a conventional penny stock in that it prioritises dividend distribution over earnings growth. This reflects its status as a real estate investment trust (REIT).

Under REIT rules, at least 90% of yearly rental earnings must be paid out by way of dividends. For this financial year (ending June 2025), this means an 8.7% dividend yield.

With exposure to multiple sectors including healthcare, retail, residential, and industrial, Alternative Income’s diversified model provides stable earnings across the economic cycle.

It’s still vulnerable to interest rate movements that can push up borrowing costs and depress asset values. But I think this threat is more than baked into its rock-bottom valuation.

Today it trades at a 13.9% discount to its net asset value (NAV) per share.

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