Looking for quality dividend shares to boost my passive income stream is an important part of my investment strategy. One stock I want to take a closer look at is Pennon Group (LSE: PNN).
Water infrastructure
Pennon is a British water company based in Exeter. Most of its profit comes from its subsidiary South West Water, but it also has international operations too.
Let’s start by taking a look at Pennon shares. As I write, they’re trading for 635p. At this time last year, they were trading for 936p, which is a 32% drop over a 12-month period. Many dividend shares have fallen in recent months due to macroeconomic issues such as rising inflation and interest rates.
What I look for in dividend shares
- Defensive traits and cash generating abilities. I believe Pennon has defensive characteristics. This is because no matter the economic outlook, water is an essential part of day-to-day life that everyone requires, including businesses. This means that people will need to pay their water bills, which should keep the money flowing in for Pennon, underpinning returns.
- Level of return. As with any dividend shares, I want to get the maximum returns possible. Pennon’s dividend yield stands at a juicy 6.7%. This is significantly higher than the FTSE 250 average, which is the index on which the stock resides. However, I am conscious that dividends are never guaranteed.
- Share price valuation. Pennon shares look good value for money on a PEG ratio of just 0.4.
- Competition. Finally, the water industry has high barriers to entry. Creating a water company and stealing Pennon’s customers is not a likely occurrence nor one that could happen very easily or quickly.
Risks and what I’m doing now
To the bearish perspective, then. There is a lot of negativity around the water industry in terms of environmental impact as well as how much customers are charged. This has impacted Pennon shares, as well as those of other water companies. This could continue to negatively impact investor sentiment.
The other issue for Pennon is that the water industry may have high barriers to entry but it is highly regulated. These regulations could change, impacting earnings and investor returns. The threat of changing regulation is an ever-present risk that I must keep an eye on.
I believe Pennon shares could be a shrewd addition to my holdings from a passive income perspective. The shares look good value for money currently and the dividend yield is enticing.
Add to this Pennon’s defensive traits and I’m sold. I’d happily add some Pennon shares to my holdings when I next have some spare cash to invest.
I’m not worried about the current negative sentiment around water companies or the threat of changing regulation. The way I look at things is water is an essential component of our lives, and I can’t see that changing for many years to come. I believe Pennon is one of a number of dividend shares that could boost my holdings and continue to grow for many years ahead.
