With the stock market tanking over the last couple of months, plenty of passive income stocks are now selling at dirt-cheap valuations. For some of these businesses, the low price is justified. But for others, maybe not.
With that in mind, let’s explore two UK stocks I believe could be excellent bargains for my passive income portfolio.
Cigarette stocks can still generate passive income
Despite the vast amount of regulatory pressure placed on the tobacco industry, companies like Imperial Brands (LSE:IMB) continue to grow at an impressive rate. Overall, cigarette sales volumes have been falling for several years now.
Should you invest £1,000 in Imperial Brands right now?
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Yet thanks to an enormous level of customer loyalty, the group continues to exercise its pricing power. As a result, both revenues and profits have been steadily climbing over the last five years. That’s an excellent trait for a passive income stock, in my experience.
The dividend payout did take a hit, courtesy of the pandemic. And increased regulatory pressure in the future may eventually start hampering growth. But this risk has not gone unnoticed by management, which has been steadily ramping up investments into healthier tobacco-based products, like oral nicotine and vaping devices.
That, to me, makes it a risk worth taking, especially considering the currently cheap valuation. After the recent tumble in the stock price, Imperial Brands trades at a low price-to-earnings (P/E) ratio of 5.5. And that comes paired with an impressive dividend yield of 8.5%!
Morals aside, I think this cheap stock could be an excellent addition to my passive income portfolio.
Thriving house-builder
Another area known for delivering substantial dividends is the housing sector. Thanks to government support schemes, the British housing market has been performing exceptionally well over the last decade. So it’s hardly surprising that Persimmon (LSE:PSN), one of the UK’s largest homebuilders, has been thriving.
Looking at the latest results, faster home completions combined with elevated house prices mitigated the impact of inflationary pressures on raw material and labour costs. Consequently, the group’s pre-tax profits for 2021 came in 23% higher than a year ago. And, in turn, management brought the next dividend payment forward from July to this month.
There are some risks to consider, of course. With interest rates rising and the Help-to-Buy scheme coming to an end next year, house prices could begin to suffer in line with affordability. In fact, this seems to be one of the primary reasons why the stock is down 27% over the last 12 months.
These are undoubtedly valid concerns. But with the stock trading at a dirt-cheap P/E ratio of 8.7, along with a whopping 11% dividend yield, this passive income stock may be worth the risk. That’s why I’m considering it as a potential candidate for my portfolio today.
