A 5% yield? Here’s the 3-year dividend forecast for Tesco shares

Jon Smith flags up the positive momentum for Tesco shares following the release of the full-year results and looks at the dividend forecasts.

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Investors that are considering buying Tesco (LSE:TSCO) shares were likely impressed by the release of the full-year results earlier this month. Even though it might be share-price growth that’s on the cards, I think there’s some solid income to be made when I consider the dividend forecast for the coming few years.

The dividend history

Tesco typically pays out two dividends a year. The main one gets announced in April with the full-year results. Even though there’s some variability on the exact amount depending on how well the year was, the amounts have been fairly consistent over the past few years.

For example, last year the final dividend was 7.05p per share, with the second payment of 3.85p announced in Q4.

The impressive 2023 results saw revenue jump from the previous year, with profit before tax at £2.2bn. This figure was significantly higher than the £882m from 2022. As a result, the dividend per share jumped from 7.05p to 8.25p.

Using the dividends paid over the past year, along with the current share price of 286p, the dividend yield is 4.28%. This compares to the 3.67% average dividend yield from the broader FTSE 100 index.

The prospect for coming years

Looking ahead, I think Tesco can perform well in the years ahead. A key factor here is the easing inflation pressures. Even though it was still high during the past year, the report noted that it “reduced gradually across the year as many global commodity prices fell and we passed savings on to customers by cutting prices across everyday grocery lines.”

So given the forecasts for this year and next are for a continued fall, this should allow Tesco to have higher demand from customers with the impact on prices. It should also help to ease pressure on profit margins.

The tight margins is a constant risk in this sector. The competitive landscape and thin margins mean that market share (and revenue) can be lost quickly.

Bringing it all together

For 2025, the expected dividend payments rise to 8.35p and 4.4p, so a total of 12.75p. For 2026, this increases again to 9.1p and 4.7p. If these forecasts are correct, then by using the current share price this would increase the yield to 4.9%.

Of course, I don’t know where the share price will be in the future. A higher or lower share price will mean a higher or lower yield. For reference, the stock is up 6% over the past year.

Yet when I consider that there are expectations for the Bank of England base rate to fall to 4.75% by the end of this year, the potential yield for Tesco shares looks even more attractive.

I understand that a yield around 5% isn’t incredibly high. But at the same time, given the strong financial results and easing grocery inflation, I think it’s a level that’s sustainable for the company to continue to pay out income.

I’m thinking about adding the stock to my portfolio and feel others should consider it, too.

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.

Jon Smith 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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