50,000 shares of this 44p penny stock could deliver £1,650 in passive income

Penny stock companies have a reputation for draining their coffers just to stay afloat, so it’s always a surprise to spot one flaunting a fat dividend. Enter Oxford Metrics (LSE: OMG), an analytics company worth just Â£50m that’s flipping the script.

It’s a small but complex business, designing and manufacturing advanced sensing devices and intelligent software solutions to measure movement and manage infrastructure. It caters to international customers in sectors like life sciences, entertainment, engineering and smart manufacturing.

At the time of writing, it offers a whopping 7.5% dividend yield, with the shares changing hands for just 44p apiece. It’s probably the cheapest high-yielding dividend stock on the UK market right now.

So, if an investor were to snap up 50,000 shares for Â£22,000, they’d be pocketing Â£1,650 in dividends each year. Of course, that’s assuming the yield doesn’t vanish overnight. Penny stocks aren’t exactly renowned for predictable returns. If the share price tanks, the dividends won’t be much consolation.

That begs an obvious question â is Oxford Metrics a genuine opportunity for passive income hunters, or is it just another value trap waiting for the next unsuspecting investor?

Crunching the numbers

Oxford Metrics pays out 3p per share in dividends, which certainly grabs attention for any investor weighing up income options in the penny stock universe.

In its latest results, though, the story took a darker turn: the company reported a Â£1.94m loss, despite reeling in Â£38m in revenue. Worryingly, cash flow covered only 67% of the dividend payouts, meaning Oxford Metrics actually lacks both the earnings and cash needed to pay these juicy dividends. It might have to borrow or rely on extra financing to keep up the payments.

Still, its track record is impressive. It’s coughed up dividends consistently for 19 years and managed to hike payouts for four years running. That reliability makes me think it’s probably got a back-up plan for tough times.

The share price bounced up 10% this month, but zoom out and it’s still 40% lower over the past five years. Even after the drop, it doesn’t look much of a bargain, sporting a forward price-to-earnings (P/E) ratio of 16.5.

The facts paint a mixed picture: a generous yield and strong dividend record, but actual earnings have crashed by 151% year on year. That’s enough to make me cautious about relying on future payouts. When dividend cover gets this thin, a cut can’t be ruled out, which means it’s one for my watchlist rather than thinking about buying at the moment.

Another example to consider

For those keen on small-cap dividend stocks, it may be worth considering the construction materials supplier Brickability Group instead. This Â£180m stock offers a 6.3% yield with a six-year dividend record. Its payout ratio is a bit risky at 172%, but cash covers the dividends three times over.

Plus, the company is profitable and looks attractively priced, trading on a forward P/E ratio of just 6.5.

When investors scout out dividend stocks, it’s critical to weigh up every angle â not just the yield on display. Otherwise, thereâs always a risk of getting stuck with overvalued shares in a company that’s just slashed its dividend.

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Mark Hartley has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.