If I invested a £20k ISA in Tesco shares, here’s how much passive income I’d receive

I’m building a portfolio of FTSE 100 shares that will hopefully give me a high and rising passive income from regular dividend payouts.

Lately, I’ve been focusing on some of the higher yielders. My most recent purchase was insurance conglomerate Phoenix Group Holdings, which currently pays a second income of a blockbuster 10.38%. However, Phoenix hasn’t delivered in the way of capital growth lately, with the share price down 21.95% over the last year.

For the sake of balance, I’m content to accept a lower dividend yield, in return for a stab at generating some capital growth too. That brings me to Tesco (LSE: TSCO) shares, which have had a good run lately.

This stock has done really well

I don’t hold this top FTSE 100 dividend growth stock and have missed out as a result. Its shares are up 14.7% over the last year, and 25.11% over five years.

On top of that, investors have enjoyed a steady flow of dividends as my table shows.

Tesco maintained shareholder payouts throughout the pandemic, although the 2023 dividend was held at 10.9p. Markets expect this to increase to 11.6p in 2024 and 12.9p in 2025.

Of course, dividends are not guaranteed but must be funded by cash flows. Tesco operates in a super-competitive market. Shoppers have been squeezed by the cost-of-living crisis at one end, while Tesco has face higher input costs at the other. Aldi and Lidl continue to hover menacingly.

I think Tesco has done brilliantly well over the last few years, given all the challenges thrown its way. I expected it to struggle and lose yet more market share, which is why I resisted buying its shares. Yet by and large, it has held firm.

I’ve also been concerned about operating margins, which have been wafer thin for years and are currently just 2.3%. They are forecast to rise to 4.2%, but I’m not totally convinced. Widening them has been a tough in the past.

I’d like to buy it

Tesco shares look pretty good value at 12.7 time earnings. On 11 January, management upgraded full-year profit guidance to £2.75bn, which drew profiteering allegations by unions.

The Competition & Markets Authority found no evidence of foul play last year, although a further investigation cannot be ruled out. Tesco’s narrow margins look like a strong argument in its defence.

What the UK’s biggest grocer has been doing is increase market share. In Q3 it took 24.5% of the market, a figure that rose to 27.9% over Christmas. Tesco’s Clubcard has been a huge success with holders now accounting for 83% of total sales.

If I invested an entire £20,000 Stocks and Shares ISA into Tesco I’d get 7,128 shares at today’s price of 280.4p. Assuming the 2024 forecast dividend per share of 11.6p comes through, they would give me income of around £827 this year. That’s a yield of roughly 4.2%.

Given Tesco’s passive income and share price growth prospects, I would definitely consider buying its shares today. Maybe not with my entire £20,000 allowance, but I’d happily invest £5,000 with a long-term view, once I have cash to hand.