I want passive income from my investments. And I’ve rarely seen a better time to aim for this than now. So many top FTSE 100 share prices have fallen, boosting those precious dividend yields.
Today I want to examine Tesco (LSE: TSCO). Its forecast dividend yield stands at 5.3%, boosted by this year’s share price weakness. Its forecast price-to-earnings (P/E) multiple stands at a modest 11.4.
The price has fallen 19% over the past 12 months, even after an October pick-up. Anyone who bought at the low point would have snagged a forecast yield of 5.8%.
I consider Tesco to be relatively steady. Demand for the basics of life — like food — tends not to vary so much. Profit margins can be squeezed during tough times, though. Right now, that’s putting pressure on Tesco, as it faces competition from the cut-price cheapies Aldi and Lidl. But market share is holding up.
How to do it
So what would it take to bag £100 per month from Tesco dividends?
With a 5.3% annual dividend yield and a share price of 220p at the time of writing, I’d need 10,300 shares. That would cost me £22,660 to buy today, and I don’t have that much spare cash lying round right now.
Fortunately, I don’t need my passive income today. I’ll be wanting it for later in my life. So I should still have some time to accumulate the investment pot I need.
Start investing now
If I start investing £100 per month in Tesco shares right now, I could reach my goal in a little over 13 years. So 13 years of putting away £100 per month starting now could get me £100 per month in passive income from then onwards, for the rest of my life. Sounds good to me.
This is based on some assumptions. One is that I reinvest all my dividends in new Tesco shares. And I base my sums on the Tesco share price and dividend not changing. In reality, the shares will vary in price. Over the long term, I expect the price to rise, so I’d get fewer shares for my monthly £100 in future years.
Against that, I see a strong likelihood that Tesco’s dividends will grow too. So each share I buy should net me more future cash. On balance though, I’d expect the yield to soften to a slightly lower level.
Real life investing
Still, in real life, I wouldn’t invest a fixed £100 per month. No, instead I’d try to increase it as time goes on. And by doing that, I’d hopefully still be able to achieve my long-term passive income ambitions.
And my monthly Tesco investment would be only part of my long-term plans. Someone, for example, who had £1,000 per month to invest could go for 10 different dividend stocks and target an eventual monthly £1,000 in passive income.
I won’t buy Tesco just now, as I have other priorities. But I have it on my list for a possible future purchase.
My Tesco example isn’t a prediction, and I’ve mentioned the very real risks only in passing. I mean this just an illustration of what could be achieved by investing regularly in dividend shares over the long term.
