Tesco (LSE: TSCO) shares have gained 25% over the past year as inflation has finally started to cool. In contrast, the FTSE 100 index is basically flat across the same time frame.
Yet, despite this uptrend, the forward-looking dividend yield for next year is still a very handy 4.4%.
So, if I wanted to target £100 a month in passive income, how many Tesco shares would I need to buy? Let’s take a look.
Investing for income
As mentioned, the shares are currently changing hands for 287p each. At today’s forecast dividend yield of 4.4% for fiscal year 2025 (which starts 26 February 2024 for Tesco), I’d need to buy 9,380 shares to earn £100 in monthly passive income.
Those would set me back £26,920, a sizeable sum of money to invest in a single company at once.
In fact, it’s more than the current £20,000 annual allowance for a Stocks and Shares ISA, so there could be some tax implications, depending on circumstances.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
A couple of caveats
Now, I should point out that Tesco doesn’t distribute monthly dividends. It pays two each year (excluding special dividends), and those are typically in June/July (the final dividend) and November (the interim). So the example £1,200 target figure here would be split among those dates.
It’s also important to note that dividends aren’t guaranteed to be paid. Even Tesco, a stable company that sells non-discretionary groceries, can cancel its shareholder payout. Indeed, the company paid no dividends at all in 2016 and 2017 following an accounting scandal and lower profits.
That said, beyond this rather serious blip, the supermarket has an impressive track record of paying shareholders. And it is a much more focused business nowadays after selling off many international and non-core operations.
Strong trading
Food inflation has been falling in the last few months, and this has helped some shoppers loosen the purse strings. It has also allowed the firm to cut prices on around 2,500 products, ranging from bread to broccoli.
Consequently, trading has been strong and management recently upgraded its full-year guidance. It now expects adjusted retail operating profits to be in the range of £2.6bn–£2.7bn, ahead of its earlier guidance of £2.4bn–£2.5bn. And the company sees retail free cash flow of £1.8bn–£2bn, up from its previous £1.4bn–£1.8bn estimate.
As impressive as that is, there are still risks to be aware of. One is that interest rates remain at a 15-year high. And according to data from the Office for National Statistics, more than 3,400 households will re-mortgage every day between 2 November and 1 May 2024.
Therefore, shopping basket sizes may come under pressure again, as people face higher repayments.
Should I buy Tesco shares?
The stock is trading at a reasonable 12 times current-year earnings, while the dividend is covered two times by earnings. So there’s a lot to like from a valuation and income perspective.
Plus, City analysts taken as a group are targeting a share price of 320p, which is 11% higher than today’s 287p. Of course, one should always take such price forecasts with a large pinch of Tesco’s pink Himalayan salt. But it’s nevertheless an encouraging sign that analysts are bullish.
So, will I buy the shares myself?
Well, with Christmas fast approaching, I’m a bit strapped for spare cash to invest. But once the holiday season is over, Tesco shares could become a candidate for inclusion in my income portfolio.
However, they’d only form a small part of a diversified mix of dividend stocks.
