I’d ideally like to end up with a portfolio of FTSE 100 stocks to generate passive income of at least £7,500 a year in retirement.
Recently I have bought top dividend stocks Lloyds Banking Group, mining giant Rio Tinto and housebuilder Persimmon, but want a minimum of 10 stocks in total, and ideally more.
I’m buying top UK dividend stocks
I’m tempted by grocery giant Tesco (LSE: TSCO), which currently yields 4.41% a year. That’s comfortably above today’s FTSE 100 average yield of 3.41%, and management has a solid track record of increasing payouts over time.
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So how much would I need to invest in Tesco to generate £750 a year in passive income, which is roughly one-tenth of my total target?
The Tesco share price is currently 247.5p. To hit my income target, I would need to buy 6,869 shares at a cost of £17,000.
I don’t have anywhere near that amount of cash today, so would have to spread out my stock purchases over time. If I invested £200 a month in Tesco shares, I would be there in just over seven years.
Investing for retirement is a long-term game, but as I’m still planning to work on for another 15 years, my Tesco share purchase plan is achievable. I could invest just £100 a month, and still be there before I stop working.
In practice, I would probably start generating my £750 a year passive income target faster than these sums suggest. That’s because most FTSE 100 companies look to increase their dividends over time. Also, I will reinvest all of mine to pick up more stock, boosting my dividend power.
Are Tesco shares a buy, though? The company’s share price has fallen 17.7% over the last year. However, longer-term investors will have fared better as it is up 18% measured over five years.
Dividend growth is more impressive. In the 2018 tax year, Tesco paid total dividends of 3p per share. This increased to 5.77p in 2019, then to 9.15p for the financial years 2020 and 2021, before climbing to 10.9p in 2022.
The dividend should grow over time
City analysts expect a small dip in the dividend this year, to 10.7p. This is disappointing but hardly surprising in tough times. For full-year 2024, analysts anticipate an increase to 11.2p per share. Today’s dividend is covered twice, so it’s hardly a stretch.
Management aims to pay out roughly 50% of its earnings to shareholders, and much depends on the company’s outlook. Tesco faces tough competition from budget chains Aldi and Lidl, and the cost of living crisis isn’t going away just yet. Yet it has hung on doggedly as far as its market share is concerned. This stands at 27.5%, a similar level to four years ago, according to Kantar.
Also, while many fear the threat from Amazon expanding in the UK grocery market, the retail behemoth no longer looks like the unstoppable force it was.
I don’t underestimate the challenge facing Tesco. It has repeatedly struggled to widen profit margins, which are forecast to fall from 4.2% today to 3.9%. Today’s low valuation of 11.9 times earnings partly reflects that. But when I have the cash, I will buy Tesco shares to help me towards my passive income target.
