If I’d invested £2,000 in Tesco shares 5 years ago, here’s how much I’d have today

Tesco shares are one of the top passive income picks in the UK, but are they actually a good investment for me? Zaven Boyrazian takes a closer look.

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Tesco (LSE:TSCO) shares are among the most popular income investments to own here in the UK. While dividends have fluctuated, the payment dates remained consistent over the past five years. And even with the pandemic acting like a bull in a china shop, the company continues to pay out today.

But does this popularity make it a good investment? And if not, then which company would be a better play for my portfolio?

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Inspecting the returns of Tesco shares

Tesco is the UK’s largest supermarket retailer. Beyond retaining a dominant market share, the company is actually the 16th most valuable retailer in the world. That certainly sounds like a stable business, especially since the demand for food isn’t likely to fall. With that in mind, its popularity as an investment does make sense. But has it managed to deliver wealth-building returns?

Over the last five years, Tesco shares have climbed by an impressive 46%. That figure jumps to just over 60%, including the passive income from dividends. That means a £2,000 investment in December 2016 would now be worth around £3,200.

That’s considerably more than any savings account would have generated. And compared to the mediocre 3% gain achieved by the FTSE 100, Tesco has proven itself to be a market-beating stock to own in recent years. And that’s despite rising competition from discount retailers such as Aldi and Lidl.

But Tesco may soon start struggling to maintain this performance thanks to inflation. With food prices on the rise, and profit margins too tight to absorb the increased expenses, shoppers may look to cheaper food retailers to save money. And there’s another company giving Tesco a run for its money. 

Optimising online grocery retail

Tesco might be dominating as far as consumers are concerned. But the lockdown restrictions in 2020 forced many consumers to rely on online grocery deliveries. While the pandemic will eventually (and hopefully quickly) come to an end, the increased reliance on online shopping might not.

An investigation by McKinsey & Company found that around half of the people surveyed who began ordering food online in 2020 intend to continue doing. This decision is most likely due to convenience. And this has created quite a favourable environment for Ocado (LSE: OCDO).

The online grocery retailer has achieved some pretty stellar returns over the last five years, despite its bumpy ride in 2021. So much so that a £2,000 investment in December 2016 would now be worth £10,736!

That’s over three times more than what Tesco shares have managed to deliver over the same period. And with the group also deep into supplying warehouse automation for other grocery retailers, including Morrisons and Kroger, this could just be the start of snowballing returns. In fact, there are even rumours that Ocado might focus entirely on its higher-margin automation technology, eventually disposing of its online grocery operations to its existing partner Marks & Spencer.

In the meantime, it has to face off against the likes of Tesco, which, of course, has its own online shopping venture. Meanwhile, Waitrose is now offering 20-minute online order delivery, thanks to its partnership with Deliveroo. Needless to say, that’s a challenging competitive environment for Ocado to operate in.

But I think the potential gains are worth the risk, making it a more exciting investment proposition for me than Tesco shares. At least, that’s what I think.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Ocado Group and Tesco. 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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