Tesco (LSE:TSCO) shares are among some of the most popular investments in the UK. And looking at its recent performance, it’s not hard to understand why.
Britain’s largest grocery retailer has been steadily taking market share over the last 12 months, boosting sales and earnings in the process. Subsequently, the share price is up a whopping 27% since June last year. By comparison, the FTSE 100 has only delivered a nearly 9% gain over the same period.
But it’s not just the potential for capital gains that entices British investors. The stock also offers a robust 3.6% dividend yield. At first glance, this may not seem all that impressive. After all, the FTSE 100 also provides a similar level of payout. But with Tesco more than quadrupling its dividend since 2018, long-term shareholders are now earning a much higher yield.
With that in mind, let’s explore just how much passive income investors could earn right now and in the future if they were to snap up 1,000 shares today.
Unlocking a second income
Right now, Tesco shares are trading at around 380p. At this price point, buying 10,000 shares currently costs around £38,000. So what do investors get in return for this chunky lump sum?
The current dividend per share is 13.7p. So a £38,000 investment today would generate a passive income of £1,370 overnight. That’s not bad, but what about in the future?
Dividend forecasts need to be taken with a healthy pinch of salt, especially long-term ones. That’s because shareholder payouts are ultimately determined by earnings, and projecting profits requires quite a few assumptions that may simply not come to pass.
Nevertheless, they can still give investors a rough idea of what to expect if no spanners are thrown into the works. And right now, analysts estimate the Tesco dividend could reach 22.9p over the next five years. That’s enough to boost the current yield from 3.6% to 6% and boost the passive income from £1,370 to £2,290.
Is this realistic?
Growing shareholder dividends by almost 70% over the next five years is certainly consistent with Tesco’s historical performance. And with management successfully leveraging the unique competitive advantage of its Clubcard loyalty scheme, the bullish sentiment from analysts certainly seems to be sound. However, even the most promising opportunities have their weak spots.
Running a network of almost 3,000 stores requires quite a large workforce. But, with recent changes made to National Insurance contributions along with Minimum Wage rates, Tesco is susceptible to wage inflation. Other retailers have similar exposure, but that creates a bit of a problem.
Supermarkets may struggle to pass on these additional costs to customers in such a competitive environment, putting pressure on already razor-thin profit margins. As such, volume growth is going to be essential for long-term success. And if discount retailers like Aldi and Lidl continue trying to chip away at Tesco’s market dominance, achieving volume growth may become increasingly harder as time goes on.
Despite these risks, Tesco’s long track record of keeping such threats at bay merits a closer look at its shares by investors seeking a reliable passive income stream.
