With a recession on the horizon, Tesco (LSE:TSCO) shares might seem like a good investment. Even in an economic slowdown, people are likely to continue to buy food, toiletries, and cleaning products.
The company accounts for around 27% of the UK grocery market sector, making it the leading operator in the sector. Its size and scale give it an advantage over its competitors.
I think that the business is likely to remain steady over time, providing consistent returns to investors. But if I’d bought Tesco shares a year ago, how much would I have today?
Share price
The Tesco share price is 3.89% lower than it was a year ago. That means that if I’d invested £1,000 in September 2021, my investment would have a market value of £961.
A decline in the market value of the stock makes it look as though Tesco shares would have been a bad investment a year ago. This is especially true given that the FTSE 100 is actually up 2.3% over the same period.
This, however, overlooks the dividends that Tesco has paid out last year. If we factor these in, I think the story starts to look quite different.
Dividends
If I’d invested £1,000 in Tesco shares a year ago, I’d have received £42.40 in dividends. There are two important points here.
The first is that it goes some way towards offsetting the decline in the share price. Adding back the dividends means that my £1,000 investment would be worth £1,003.40.
This is obviously welcome. But there’s another – more important – reason for paying attention to Tesco’s payouts.
Reinvesting
Receiving dividends allows me to increase my ownership in the companies that I’m invested in. In the case of Tesco, I could have reinvested the £42.40 and bought more shares.
This is likely what I would have done over the last year with my Tesco dividends. But this means that the lower share price is a good thing.
At today’s prices, I could increase my ownership in the company by 17 shares. But if the share price was 10% higher, I’d only have been able to buy another 15 shares.
For someone looking to reinvest dividends to buy more shares, lower share prices are better. As such, the fact that the Tesco share price is lower today than it was a year ago is a good thing for me.
Dividend investing
I think of Tesco as a dividend stock. That means that I see the investment return primarily in terms of the money it pays out to shareholders.
As such, I’d want to own as many shares in the company as possible in order to get as much income as I can. One way I’d do this is by reinvesting dividends.
This means that the slight decline in the Tesco share price isn’t something that should worry me. Lower share prices let me buy more shares with my dividends and boost my passive income more dramatically.
