Tesco (LSE:TSCO) shares struggled over the past year as inflation soared. The supermarket stock slumped 8%. By contrast, the FTSE 100 index climbed 5.5% in the same time frame.
However, after entering an uptrend in recent months, a sustained recovery might be on the cards for the Tesco share price. What’s more, the stock offers a 4.5% dividend yield, which comfortably beats the Footsie average of 3.7%.
So, if I wanted to target £100 a month in passive income, how many shares would I need to buy? Let’s explore.
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Dividend income
Currently, Tesco shares trade for 255p each. At today’s dividend yield, that means I’d need to buy 10,389 shares to earn £100 in monthly passive income.
That number of shares would cost me a total of £26,491.95 — that’s an awful lot to invest in a company at once, but it shows what kind of investment I’d need to make in the supermarket to earn £1,200 in dividends each year.
Now, it’s important to note that dividends from any company aren’t guaranteed, Tesco included. However, the supermarket has an impressive track record in this regard.
The business continued to pay shareholders distributions throughout the 2008 financial crisis and the 2020 stock market crash caused by the onset of the pandemic. Plus, dividend cover remains strong at around two times earnings.
In reality, I don’t have the amount of spare cash that I’d need to invest in Tesco in order to secure a £1,200 annual passive income haul. However, I’m happy to rely on a lower income stream from the stock, as I regularly invest in other dividend shares to diversify my portfolio.
The outlook for Tesco shares
Encouragingly, Tesco’s Q3 results were largely positive. Group retail sales increased 5.7% versus the same period in 2021/22. The company reconfirmed its guidance for FY22/23, namely retail adjusted operating profit between £2.4bn to £2.5bn and retail free cash flow of at least £1.8bn.
In addition, there’s growing speculation that the supermarket could offload its banking arm at a mooted £1bn sale price. This could be good news for the Tesco share price, as it allows the firm to concentrate on its core business offering and gives it leeway to remain competitive with German discount brands Lidl and Aldi.
Currently, Goldman Sachs is undertaking a review of the proposed sale. I don’t expect there will be rapid movement on this front, but it’s something I’ll monitor closely over the coming months.
There are a number of risks facing the supermarket. Inflation continues to put pressure on the company’s margins, compounded by increasingly cutthroat competition in the sector. Plus, I think the debt burden the business is carrying looks a little too high.
Should I buy this stock?
Overall, I think Tesco’s heading in the right direction, but there are a number of challenges that cloud the outlook. Given the risk/reward profile, I’ll continue to hold the Tesco shares I own, but I’m not rushing to buy more at present.
Although the prospect of earning £100 in monthly passive income from the supermarket stock is tempting, I’d prefer to target that sum from a diversified mix of dividend shares, rather than concentrating my portfolio too heavily in Tesco shares.
