To most people, the idea of giving up the day job to live off dividends paid by FTSE 100 stocks sounds like a pipe dream. However, it is theoretically possible, assuming I have enough money to invest.
For the purpose of this article, let’s imagine I bought Tesco (LSE: TSCO) shares and wanted to retire on the dividends they provided. How much would I need to invest? Let’s find out.
Living on dividends
The salary someone earns obviously varies from person to person. Therefore I’m going to use the UK median annual pay for full-time employees. And according to The Office for National Statistics, that was £33,000 for the tax year ending 5 April 2022.
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Clearly then, I’m going to need to buy quite a few Tesco shares to be able to generate that amount of income. But just how many exactly?
Well, that will depend on the size of the dividend that’s due to be paid. City analysts expect Tesco to pay out 10.9p per share for its current financial year (ending 25 February 2024).
That gives the stock a dividend yield of 4.1% and means I’d need 302,750 shares to generate my desired sum. They would set me back around £805,000 as things stand.
The good news though, is that the Tesco dividend is predicted to increase to 11.9p per share next year. It means I’d potentially be getting a pay rise for doing nothing!
Instead of £33,000 in dividends, I’d be receiving around £36,000, if City forecasts prove to be accurate, which isn’t always the case.
Obviously, as with most income, there would likely be tax implications to consider based on personal circumstances.
Will I buy the shares?
Now, I’d never want to put all my eggs in one basket — pardon the pun — investing in just one share. If Tesco were to cut the dividend at some point, then naturally I wouldn’t be receiving the income I need to live on that year.
In the worst case scenario, the payout could be cancelled altogether.
Indeed, that is what happened in January 2015 following Tesco’s disclosure that it had overstated its profit forecast. It cancelled its dividend for the following fiscal year. So nothing is ever guaranteed, which is why I keep my own income portfolio well diversified.
In terms of the company today though, it does seem to be more sure-footed than it was back then. After failing to replicate its domestic success abroad — most noticeably in the US and China — it largely gave up its ambitious global expansion plans. The business is a lot more focused as a result.
Plus, there have been reports that the supermarket giant is reviewing its presence in the UK banking sector — a move that could lead to the sale of Tesco Bank.
I think this makes sense. It has a market-leading position it needs to continue defending in the increasingly competitive UK supermarket space.
I don’t currently own the shares, and don’t plan to buy any, as I believe there are better income stocks around for my portfolio today.
That said, Tesco is a fantastic company whose brand is extremely well-trusted. I imagine the tills will keep ringing for years to come, as will the flow of dividends to shareholders.
