Tesco (LSE:TSCO) shares spent a few radioactive years in the wilderness following the 2014 accounting scandal. And rightly so, as this shocking incident led to the cancellation of the grocery giant’s dividend, totally shredding investor confidence.
But the stock is back with a bang, rising 110% in five years, with growing dividends on top. This is more than double the equivalent 51% return from the FTSE 100, before dividends.
No doubt, this is fantastic for long-term shareholders. But where does it leave the payout today for new investors?
An incredible two years
Looking at the chart, the share price started moving higher in early 2024. In fact, over 60% of the gains have come in the past two years alone.
Early 2024 was when Tesco announced the sale of most of its banking operations to Barclays for £700m. By offloading the bank, the company became more of a pureplay grocer again.
However, the supermarket retained all the capital-light insurance and money services, including ATMs, travel money and gift cards. And Tesco returned the proceeds to investors via share buybacks — another thing that has helped boost the share price.
The stock really started to accelerate in mid-2024 when interest rates were cut from a 16-year high of 5.25%. Lower rates helped ease the cost-of-living pressures, allowing shoppers to start buying more items than just the bare essentials in-store.
Underpinning all this have been consistent market share gains. In June 2024, Tesco reported its share had grown ahead of all key competitors, increasing 52 basis points to 27.6%. By Christmas 2025, it had reached 29.4% in the UK, its highest share in over a decade.
But where does the stock’s rapid rise leave today’s dividend?
Passive income prospects
Tesco’s offering a 3.4% forecast yield, which means 1,500 shares bought today would pay out approximately £238 in passive income. At 466p per share, these would cost just under £7,000.
Now, it goes without saying that the dividend forecast isn’t assured. Tesco investors found that out the hard way back in 2014/15.
That said, with the focus now squarely on the core grocery operation, Tesco appears to be in a far better position today. The forecast dividend is covered twice over by expected earnings, offering a solid margin of safety.
Is the stock still worth considering?
One area that continues to impress me is the supermarket’s online delivery business. In the 19 weeks to 3 January, online sales grew 11.2%.
A few years ago, CEO Ken Murphy warned that the proliferation of rapid-delivery start-ups had the potential to cause major supermarkets “death by a thousand nibbles“. However, its own rapid-delivery service Whoosh saw sales surge 47% in those 19 weeks, gaining over a quarter of a million new customers.
Tesco has successfully leveraged its vast store network, turning what was once seen as a disadvantage into an advantage. Crucially, most customers aren’t replacing supermarket visits and the numbers are showing that Whoosh sales are incremental.
A key risk here is inflation creeping back up, exacerbated by the Iran war and oil rocketing above $100 a barrel. Food and transport costs could rise again, which is far from ideal for shoppers or Tesco’s operations.
Despite this risk, I think the shares are still worth considering long term, especially for income investors who regularly reinvest dividends.
