1 cheap penny stock that boosts passive income and has great growth prospects!

This Fool likes this penny stock that currently looks good value for money, has an enticing dividend yield, and growth prospects.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young brown woman delighted with what she sees on her screen

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

In my hunt for the best stocks to buy, I came across a penny stock that really excites me for a few key reasons. Here’s why I like Severfield (LSE:SFR) shares and why I plan to add some to my holdings.

Steel for construction

As a quick introduction, Severfield specialises in the design, manufacture, and installation of structural steelworks used in construction. Based on turnover, it is one of the largest firms in its market in the UK and one of the largest in the whole of Europe, with a capacity exceeding 165,000 tonnes per year.

It is worth remembering that a penny stock is one that trades for less than £1. So what’s happening with Severfield shares currently? Well, as I write, they’re trading for 58p. At this time last year the stock was trading for 78p, which is a 25% drop over a 12-month period. I’m not concerned by its share price drop. In fact, I consider it an opportunity to buy cheaper shares.

A penny stock with risks

Despite my overall bullish stance, I must be wary of certain risks associated with Severfield shares. The main risk currently is macroeconomic headwinds. I also believe these have contributed to the shares falling. Soaring inflation, the rising cost of raw materials, and supply chain issues could all have an impact on profitability, operations, and investor returns. For example, rising costs could put pressure on profit margins, which could affect its dividend.

Furthermore, due to the current issues noted above, demand could be affected due to rising prices, which could halt construction projects. I view this as a short-to-medium term risk, however.

Why I like Severfield shares

So to the positives then. Firstly, Severfield’s profile and presence is a huge plus. Its size and reach should help to boost performance, growth, and returns. Linked to this is the construction boom occurring the world over. The pandemic shocked the world economy but with restrictions seemingly a thing of the past, infrastructure spending on construction is booming. I’m particularly buoyed by Severfield’s exposure to the Indian market, which is undergoing rapid infrastructure expansion as an up-and-coming world economy.

Next, I believe Severfield shares look great value for money currently on a price-to-earnings ratio of just 11. A general rule of thumb is that a ratio of under 15 represents value for money.

Severfield would also boost my passive income stream through dividend payments. I am aware that dividends can be cancelled at any time, however. At current levels, the dividend yield stands at an enticing 5.5%. A penny stock with a yield higher than the FTSE 100 average of 3%-4% is extremely tempting to me.

Finally, Severfield has an excellent track record of performance, although I do understand that past performance is not a guarantee of future performance. Looking back, I can see that it has grown revenue and profit for the past four years.

In conclusion, I believe Severfield is a penny stock that is too good for me to miss. This is why I plan on buying some shares for my holdings.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jabran Khan 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.

More on Investing Articles

Investing Articles

Up 105% in a year! Is this rocketing FTSE bank the perfect pick for my Stocks and Shares ISA?

Harvey Jones is drawing up a shortlist of stocks to purchase inside his Stocks and Shares ISA allowance. This FTSE…

Read more »

Investing Articles

Is it madness to buy Palantir shares after Q3 earnings?

Palantir stock's surging again after the firm's Q3 earnings report. But after a 150% gain, is it too late to…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£6,000 in savings? Here’s how I’d aim to turn that into £1,032 a month of passive income!

A small investment in high-dividend-paying stocks with the returns used to buy more shares can generate big passive income over…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Investing Articles

As Lloyds’ share price tumbles 14%, is this an unmissable opportunity for me to buy at a bargain-basement price?

The Lloyds share price is substantially below its year high, but decent earnings prospects should drive its price and dividend…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

2 UK shares that could rise if Trump wins the Presidential election

These UK shares are among the FTSE 100's most popular stocks. And they could rise in value if Donald Trump…

Read more »

Closeup ruffled American flag representing US stocks and shares
Investing Articles

2 UK stocks that could rise if Harris wins the Presidential election

Royston Wild believes these UK stocks could receive a bump if Kalama Harris wins the Presidency, giving their share prices…

Read more »

Investing Articles

After a 96% plunge, is buying more Aston Martin shares throwing good money after bad?

Just two weeks after buying Aston Martin shares Harvey Jones found himself nursing a painful loss. Yet after recent news…

Read more »

Investing Articles

After crashing 45% in October, should I buy this FTSE 250 share for my Stocks and Shares ISA?

Roland Head explains why he’s tempted to add this risky FTSE 250 turnaround share to his Stocks and Shares ISA…

Read more »