I’m on the lookout for dividend stocks that could boost my passive income. One stock I’m considering adding to my holdings is Tesco (LSE: TSCO).
Supermarket giant
Tesco is the UK’s largest supermarket chain. It also possesses a wholesale operation after it purchased Booker in recent years.
Let’s start by taking a look at Tesco’s share price. As I write, Tesco shares are trading for 260p. At this time last year, they were trading for 264p, which is a 1.5% drop over a 12-month period. More tellingly, Tesco shares have rallied 30%, from 200p to current levels since the end of September 2022.
The investment case
Let’s break down the pros and cons of me buying Tesco shares as a passive income stock.
To start with, I consider Tesco to be a defensive stock. This is because it sells essential food and everyday items consumers need including healthcare, toiletries, and home products. No matter the economic outlook, people need to eat and use personal hygiene products as well as keep their homes tidy. As well as its defensive capability, Tesco’s position as the largest supermarket in the UK can help it to translate this demand and its position into profits and shareholder returns.
On the flip side, Tesco’s market share has been dwindling for some time. This is mainly due to the rise of European competitors Lidl and Aldi entering the UK market and rapidly gaining market share. The price wars have led to many consumers changing their supermarket allegiance. Tightening margins for Tesco to combat the changing tide could impact profits and investor returns.
So let’s take a look at Tesco’s current rates of return. At present, it offers a dividend yield of just over 4%, which is above the FTSE 100 average. It is worth remembering that dividends are never guaranteed and can be cancelled at the discretion of the business at any time.
The current cost-of-living crisis means that many consumers are now essentially hunting for the cheapest products available. This is bad news for Tesco, and many other larger established retailers. Once-loyal customers may travel further, or go elsewhere to make their budget stretch further. One aspect where Tesco does well to attract its customers is its excellent Clubcard loyalty scheme where customers can build up points to be used, as well as purchase certain items cheaper than advertised.
Should I buy Tesco shares for passive income?
For me personally, there is a lot to take into account when considering Tesco shares for my holdings.
Tesco’s market position and size in the UK market is enviable. It also possesses a decent yield for returns at present too. On the other side of the coin, the current economic volatility and competition are factors putting me off investing.
Right now, I’ve decided to keep Tesco shares on my watch list. I believe I could use my hard-earned cash to buy better passive income stocks elsewhere. However, I will keep a close eye on developments.
