Tesco (LSE:TSCO) shares have emerged victorious from the cost-of-living crisis. The company’s retained market share, advanced earnings, and could be poised to benefit as Britons move away from less premium options.
As an investment opportunity, it’s also an interesting pick for passive income. The dividend yield currently sits at 3.3%. And this is expected to rise over the coming years.
That forecast
The dividend forecast for 2025’s very promising. The projected dividend per share is expected to reach 13.4p, representing and modest increase on 2024, and a forward yield of 3.6%, based on the current share price.
The company’s dividend growth trajectory looks steady, with forecasts indicating further increases to 14.6p in 2026 and 15.7p in 2027. These projections suggest a rising yield of 3.9% and 4.2% respectively for those years.
Importantly, Tesco’s distribution rate’s expected to stabilise around 50% from 2025 onwards, indicating a sustainable payout policy. In other words, the company could afford to pay its dividend twice from earnings. That’s a healthy ratio.
This forecast trajectory and distribution ratio suggests the dividend could continue to grow over the long run unless Tesco experiences a severe downturn.
Rising dividends are important
Investing in companies that consistently increase their dividends can be highly rewarding. And there’s no better testament to this than billionaire investor Warren Buffett’s legendary Coca-Cola stake.
Buffett’s Berkshire Hathaway is set to receive $776m in dividends from Coca-Cola in 2024, representing a staggering 59.7% yield on his original $1.3bn of investments between 1988 and 1994.
This showcases the power of dividend growth over time. Companies that raise dividends regularly often demonstrate financial strength, consistent profitability, and shareholder-friendly management.
The current forecast suggests that Tesco’s growing its dividend by around 8.5% annually. That level of growth might not be sustainable over the long run. However, it would mean a £1,000 investment today could yield £456 annually in 30 years, without any reinvestment in the meantime.
Is Tesco worth considering?
Despite surging almost 30% over the past 12 months, Tesco appears to have a strong investment proposition. The company’s achieved its highest market share since December 2017, now holding 28.1% of the UK grocery market, according to Kantar data.
This dominant position, combined with a 5.2% jump in sales, illustrates Tesco’s resilience and growth potential in a competitive sector. Looking ahead, Tesco’s earnings per share (EPS) are projected to grow steadily, reaching 25.3p in 2025, 27.2p in 2026, and 29p in 2027.
Investors should however be wary about the impact of upcoming hikes to National Insurance contributions. Combined with the Minimum Living Wage, this could eat into underlying earnings by as much as 8%, according to Citi analysts.
Nonetheless, the stock’s current valuation appears attractive, trading at 14.4 times forward earnings for 2025, falling to 12.6 times for 2027. This suggests potential for share price appreciation alongside the growing dividend, making Tesco an attractive option for both income and growth investors to consider.
I’m not buying Tesco stock yet as I’m currently assessing my options for 2025, but it’s on my watchlist.
