Boosting your State Pension with a passive income from shares is a great idea. But knowing which shares to buy for a pension fund isn’t easy. Today I’m going to explain why I think Tesco (LSE: TSCO) shares could be a good retirement buy.
State pension worries
The full state pension is currently around £9,100 per year. For many people, this won’t be enough to continue a pre-retirement lifestyle.
There’s also a second concern. With the State Pension age now at 66 and set to rise further, retiring early isn’t an option unless you’ve another source of income.
Personally, I’m aiming to build an investment portfolio that will generate an income which matches the State Pension. In other words, I’m hoping to double my pension by buying shares.
Why choose Tesco shares?
I admit that the UK’s largest supermarket is never likely to be an exciting growth stock. Investors wanting to double their money in a couple of years should probably look elsewhere. But that kind of performance comes with risks I want to avoid.
There are a couple of reasons for this. Firstly, when you’re younger you have the time and income needed to recover from mistakes and bad investments. When you get close to retirement age, it becomes very difficult to make up any lost ground.
The second reason why I’m not targeting exciting growth stocks for my retirement fund is that this kind of investment needs close management. Although I really enjoy investing now, I don’t want to have to depend on being an active investor as I get older.
Instead, I want to use my working years to build a retirement portfolio that will provide a reliable stream of dividends while needing very little maintenance.
Tesco looks in great shape to me
Last week’s half-year results confirmed my view that Tesco is in good shape at the moment. Operating profits from the group’s retail division (excluding Tesco Bank) rose by 4.4% to £1,192m during the six months to the end of August. Margins remained impressive, at 4.2% — better than any of its big three rivals.
Although Tesco reported around £533m of extra costs relating to Covid-19, these were largely offset by savings from not having to pay business rates on its shops this year.
Why I’d buy Tesco shares
I think that ex-CEO Dave Lewis, who left the firm on 30 September, has done a great job transforming Tesco from a bloated, inefficient business into a lean, focused and growing operation. Although I’m sad to see Mr Lewis leave, highly-regarded chairman John Allan remains in charge and new CEO Ken Murphy has an impressive CV.
Mr Murphy has already indicated that he’s likely to leave the dividend policy set by his predecessor unchanged. Tesco’s interim dividend rose by 20% to 3.2p per share last week, putting the stock on a forward yield of around 3.8% for the full year.
City analysts expect a return to earnings growth next year, and Tesco’s sizeable wholesale business means that it should benefit from any rebound in the hospitality trade.
With the shares trading on 12 times 2021/22 forecast earnings, I think Tesco should deliver reliable long-term returns for retirement investors. I rate Tesco as a buy.
