If I put £10,000 in Tesco shares today, how much passive income would I receive?

Our writer considers whether he would add Tesco shares to his portfolio right now for dividends and potential share price growth.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Tesco plc

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Tesco (LSE: TSCO) shares have tended to trade in line with the FTSE 100 over the last few years. More recently though, they’ve been left behind a bit as the blue-chip index has rallied to record highs.

For example, the FTSE 100 is now up 9.5% in five years compared with Tesco’s 9% decline. Year to date, the index has risen just over 5% versus a 1.7% drop in the Tesco share price.

However, none of these figures include dividends. So here, I’ll look at how much income I’d get from £10k worth of shares and consider whether that’s enough to persuade me to invest in them.

A resilient showing

To be honest, I’m a little bit surprised at this underperformance from Tesco stock. After all, it gained a bit of market share last year and there was a return to positive volume growth as inflation started to ease.

Group sales excluding VAT and fuel rose 7.2% year on year to £61.5bn. And adjusted diluted earnings per share increased 14% to 23.41p.

I thought the market would have rewarded the stock a bit more for this strong financial performance.

Competition and low growth

I’m a Tesco customer — kept loyal by the Clubcard — and I think the company has worked hard to reduce prices from the shocking inflation we all suffered in early 2023.

Then again, I was visiting my aunty recently and we shopped at her local Morrisons. I was also impressed with the pricing and range on offer in there. Perhaps I’m just easily impressed.

Or perhaps this speaks to a wider issue, which is that UK supermarket chains are incredibly well-oiled machines these days. Most shoppers are creatures of habit and tend to stick to what they know (usually the closest well-run store). My aunty has shopped in that Morrisons for decades.

Which is to say, market share gains in this industry are usually accumulated at a glacial pace. The German discounters are an exception, as they quickly gained market share during the cost-of-living crisis. But how much more market share Aldi and Lidl take from this point remains to be seen.

This is an incredibly competitive industry and there just isn’t that exciting growth to get investors’ juices flowing.

Unappetising dividend yield

Meanwhile, the forecast dividend yield for this financial year (which started in March for Tesco) is 4.4%.

This means I could expect to receive around £440 in passive income from a 10 grand investment in the shares.

That’s not much more than the FTSE 100 average of 3.9%. And it doesn’t seem very attractive when dividends aren’t guaranteed and I can currently get similar or even better returns sitting in cash.

I’m looking elsewhere

Now, this isn’t to say that Tesco isn’t a great company. It clearly is because it still reigns supreme after all these years, and despite all the competition. I expect it to remain tog dog for many years.

But I don’t see any meaningful catalysts on the horizon to jolt the shares upwards. And while I do think the dividends look reliable and could therefore play a role in a diversified income portfolio, I’d rather invest elsewhere.

There are other FTSE 100 stocks offering higher yields and likely better growth prospects right now.

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.

Ben McPoland 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.

More on Investing Articles

Investing Articles

No savings? I’d use the Warren Buffett method to target big passive income

This Fool looks at a couple of key elements of Warren Buffett's investing philosophy that he thinks can help him…

Read more »

Investing Articles

This FTSE 100 hidden gem is quietly taking things to the next level

After making it to the FTSE 100 index last year, Howden Joinery Group looks to be setting its sights on…

Read more »

Investing Articles

A £20k Stocks and Shares ISA put into a FTSE 250 tracker 10 years ago could be worth this much now

The idea of a Stocks and Shares ISA can scare a lot of people away. But here's a way to…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

What next for the Lloyds share price, after a 25% climb in 2024?

First-half results didn't do much to help the Lloyds Bank share price. What might the rest of the year and…

Read more »

Investing Articles

I’ve got my eye on this FTSE 250 company

The FTSE 250's full of opportunities for investors willing to do the search legwork, and I think I've found one…

Read more »

Investing Articles

This FTSE 250 stock has smashed Nvidia shares in 2024. Is it still worth me buying?

Flying under most investors' radars, this FTSE 250 stock has even outperformed the US chip maker year-to-date. Where will its…

Read more »

Investing Articles

£11k stashed away? I’d use it to target a £1,173 monthly passive income starting now

Harvey Jones reckons dividend-paying FTSE 100 shares are a great way to build a long-term passive income with minimal effort.

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

10% dividend increase! Is IMI one of the best stocks to buy in the FTSE 100 index?

To me, this firm's multi-year record of well-balanced progress makes the FTSE 100 stock one of the most attractive in…

Read more »