How much must I invest in Tesco shares to earn income of £1,000 a year in 2024?

Tesco shares have given investors a winning combination of dividend income and share price growth lately. Should I buy them?

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Tesco (LSE: TSC) shares have had a jolly good 2023. They’re up 22.26% over 12 months and 39.8% over five years. Despite a strong November, the FTSE 100 as a whole is down 0.5% over one year and up just 11.08% over five.

Anybody who thought the UK’s biggest grocer would wilt under the onslaught from German discounters Aldi and Lidl got it wrong.

Its performance is even more impressive given the pandemic, energy shock and cost-of-living crisis. Tesco has shown it’s got staying power. Yet from my point of view, this has several disadvantages.

Have I missed my moment?

I didn’t buy Tesco one year ago or five years ago. I’ve never bought the stock, so I’ve missed out on the fun. Also, its recent strong performance has made its shares that little bit more expensive, while shrinking the yield at the same time. I have to balance that against the positive news that Tesco can still deliver the goods.

I’ve spent recent months targeting dividend-paying FTSE 100 stocks, so why didn’t I buy Tesco? First, because I was looking for companies that were still out of favour with the market. Second, I focused on ultra-high-yielders. My purchases included Lloyds Banking Group, Smurfit Kappa Group and Taylor Wimpey, which I hope will deliver Tesco-like performance going forward. Only with higher dividends.

Currently, Tesco shares yield a solid 3.9% a year. That’s in line with the FTSE 100 average. They’re nicely covered two times by earnings and the outlook seems positive too. The stock is forecast to yield 4.04% in 2024, and 4.52% in 2025.

Using the 2024 figure, to generate income of £1,000 solely from Tesco I’d need to buy 8,853 shares at today’s price of 279.6p. That would cost me £24,752. That’s more than I can afford to invest in any one stock, I’m sad to say.

Better value out there

Also, if I wanted to generate maximum income, this isn’t the stock I’d buy. Right now, insurance conglomerate Phoenix Group Holdings yields a bumper 10.81%. I’d only need to invest £9,251 to get the same £1k income. 

Phoenix is also much cheaper, trading at 5.71 times earnings, with its share price down 20.51% in the last year. Tesco is valued at 12.96 times. The price of success.

I’m only using Phoenix as an example of what I could buy instead. That double-digit yield is hardly typical and comes with risks. Yet it also confirms my concern that Tesco shares aren’t quite as exciting as I’d like them to be. After a good run, I may have missed my moment.

JPMorgan Cazenove has just published its view, which broadly reflects mine. The broker cut its Tesco price target from 240p to 230p, warning that disinflation could hit grocery sector like-for-like sales, margins and valuations. It pinned Tesco’s recent success on “executed self-help and macro tailwinds”, and said it may be hard to repeat.

I’m a big admirer of Tesco’s recent achievements and thrilled for anybody who took a chance on the stock when I didn’t. I just don’t think now is the right moment to consider buying it. I can see better value out there.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco Plc. 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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