Boosting my passive income stream through dividend stocks is an important part of my investment strategy. I believe Persimmon Homes (LSE:PSN) could be a great option. Let’s take a closer look at it.
The UK’s largest house builder
As a quick reminder, Persimmon is the largest house builder in the UK. The York-based firm has approximately 400 developments throughout the country and 31 regional offices. Through acquisitions of premium brands such as Charles Church and Westbury as well as others, it has continued to grow since its inception in 1972.
So what’s happening with Persimmon shares currently? Well, as I write, they’re trading for 1,501p. At this time last year, the stock was trading for 2,533p, which is a 40% decline over a 12-month period. I’m not concerned by the share price drop. In fact, this could be an opportunity to buy cheap shares.
A passive income stock with risks
Current economic volatility caused by macroeconomic headwinds has pushed Persimmon and many other UK shares downwards. These headwinds include soaring inflation, the rising cost of raw materials, as well as a global supply chain crisis. Rising costs put pressure on profit margins, which underpin returns. Next, supply chain constraints could hinder Persimmon’s ability to complete developments and could affect sales.
Next, the Bank of England (BoE) has increased the base interest rate in the UK to combat inflation. This means mortgage rates are higher too, effectively making it harder for some consumers to purchase properties. This could affect demand for Persimmon homes, and in turn, its performance and any passive income I hope to make.
Why I like Persimmon shares
So to the bull case then. Firstly, I’m buoyed by Persimmons’ profile and presence, especially as the housing market is growing currently. This is because demand for homes in the UK is outstripping supply. House builders should be able to benefit from this and leverage this into performance growth and increased returns.
Next, with Persimmon shares continuing to fall, they look great value for money to me right now on a price-to-earnings ratio of just seven. The FTSE 100 average ratio is closer to 15.
For any passive income stock I’m considering, I want to know the dividend yield on offer. At current levels, Persimmon’s yield stands at a huge 15%! This is over three times the FTSE 100 average of 3%-4%. It is worth remembering that dividends are never guaranteed and can be cancelled at the discretion of the business at any time, however.
Finally, I understand that a falling share price and a high dividend yield could mean a business is struggling and there could be trouble afoot. In this case, I see Persimmon has a good business model and a good track record of performance. I am aware that past performance is not a guarantee of the future, however. Consistent profit generation and consistent cash surplus being returned to investors fills me with confidence. Furthermore, the future looks safe with strong demand for housing.
To summarise, I would buy Persimmon shares to boost my passive income stream. I believe the risks noted above are shorter term, and would expect a bit of volatility ahead but recovery in the longer term.