Even though Tesco (LSE:TSCO) shares have dropped by 7% over the past month, the share price is still modestly up over the past year. Even though such performance doesn’t make it a hugely appealing purchase now for growth investors, having a relative lack of volatility is good news for income investors.
So if I invested now, here’s what my potential income could be.
Show me the money
The main metric to consider when looking at income is the dividend yield. This takes the annual dividend per share payment and compares it to the current share price. From this, I get a percentage yield, which can be easily used to compare different dividend stocks.
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At the moment, the Tesco dividend yield is 4.14%. The FTSE 100 average is 3.75%. So I can see straight away that it’s a stock that should be considered above average.
If we assume that the dividend yield remains unchanged, then after purchasing £10,000 worth of stock, I’d expect to receive £414 over the next year.
Differing potential
One drawback of the dividend yield is that it takes the payments from the past year. So when projecting forward, the dividend per share could easily change.
This is why I look at dividend forecasts. Over the past year, the interim dividend was 3.85p and the final dividend was 7.05p, for a total of 10.9p. For 2023, the numbers are expected to be 3.85p and 6.7p, making 10.55p. For 2024, the forecast is for two payments of 4.25p and 7.7p, totalling 11.95p.
So if I take the current share price, my £10,000 would in theory pay me £401 this year and £454 next year. This highlights that there is definitely some variability when trying to predict the future amount of money I could get!
As a side note, my calculations don’t include any special dividends (like the large one paid from the disposal of the Thai and Malaysian businesses during the pandemic). There is no certainty of future special dividends, but the potential is always there.
Risk and reward
Despite the potential for differing amounts, I’m very confident that Tesco shares will pay out some passive income in coming years. Given the company history, I struggle to see why the dividend would be cut to zero.
The risk comes from the fact that £10,000 is a lot of money. Putting it all in Tesco shares for income might not be the smartest play. Especially given that I can find some attractive companies paying 5%-7% yields, I’d rather invest £1,000 in Tesco and split the rest into different stocks. That way, I can reduce my risk of Tesco dividend income declining in the future. Yet I can also hopefully get a higher blended dividend yield from my entire portfolio by including other stocks.
