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.

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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.

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