Here’s how much passive income I’d get if I invested my entire £20k ISA into Tesco shares

Tesco shares look like a great pick for a second income. But would our writer feel comfortable investing all his ISA money in the FTSE 100 giant?

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Image source: Tesco plc

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Tesco (LSE: TSCO) shares are up a very healthy 22% in the last 12 months. That’s pretty much double the return of the FTSE 100.

Of course, this doesn’t include the positive impact of any cash received in the form of dividends. And right now, a fund that tracks the return of the UK’s top tier yields around 3.6%.

Thing is, Tesco is no slouch when it comes to handing cash back to its owners either. Quite the opposite, in fact.

So, how much might I conceivably make in passive income if I invested my entire £20k Stocks and Shares ISA limit in the supermarket?

Show me the money!

Analysts currently estimate that the company will return 12.7p per share in this financial year. If we divide that by the share price as I type (307p) and multiply by 100, we get a very respectable dividend yield of 4.1%.

In practice, this means I’d be in line to generate £827 in annual passive income if I decided to invest the full ISA amount in the stock.

Would I do this?

I think there’s a lot to like about owning a slice of Tesco.

First, it remains the clear leader when it comes to UK supermarkets. Its market share currently stands just below 28%. Rival Sainsbury’s is in second spot with only 15%. That’s the sort of dominance I look for, even if it has fallen slightly over the years as German budget chains Aldi and Lidl have grown in popularity.

Second, Tesco operates in a sector with solid ‘defensive’ credentials. Yes, the cost-of-living crisis has pushed many of us to cut spending. But everyone still needs to eat. This means earnings are relatively predictable. That’s generally good news for the income stream.

Speaking of which, this year’s payout is expected to be covered twice by profit. In other words, a cut looks unlikely as things stand.

Third, the £21bn cap is expected to raise its total payout by another 10% in the next financial year. Although we shouldn’t place too much weight on predictions that far in advance, it would mean more income coming my way if it happened.

Risky bet

But hold on. Investing my full £20k ISA allowance in any one company is surely risky, regardless of how large or established said company is.

This is particularly relevant when talking about Tesco. Back in 2014, an accounting scandal rocked the business. In a nutshell, the firm had overstated profit by hundreds of millions of pounds.

Somewhat inevitably, trust was lost and the share price tumbled. Dividends were also shelved and not reinstated until October 2017.

In sharp contrast, having my entire £20k in a FTSE 100 tracker fund — as mentioned earlier — would have seen me receiving dividends throughout this time thanks to my money being diversified.

Food for thought.

My verdict

Taking into account all of the above, I believe I would invest in Tesco shares if generating income were my only goal, if I wanted to generate a higher yield than the major index, if I had the cash available and — vitally — if I was comfortable with the risks involved.

But it definitely wouldn’t be the only stock I’d spend my entire £20k on!

Fortunately, there’s no shortage of other UK shares out there with solid income credentials.

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.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended J Sainsbury Plc and 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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