Tesco (LSE: TSCO) shares are understandably popular among UK investors looking for dividend income.
The supermarket chain has an incredible brand, loyal customers, and a leading market position that it has maintained for decades. This leads to repeat business and a dependable dividend, barring the odd serious blip (more on that soon).
Personally, I think it’s the sort of investment I can hang my hat on for income. Which leads me to wonder just how many Tesco shares I’d need to stop working and survive on the passive income.
How much is enough?
First off, I’d need to define exactly how much I’d need. Of course, this can vary wildly, depending on whether I prefer to sit and read for hours on end like Warren Buffett or pamper myself in a plush spa resort.
Every person’s needs, wants, and financial situations are different. So let’s go on averages.
According to Statista, the median annual earnings for a full-time worker in the UK last year was £34,963.
How many Tesco shares would I need to buy to aim for this amount?
The maths
Well, the stock’s forecast dividend yield for FY 2025 (which encompasses most of this year), is 4.4%. That’s based on today’s share price of 295p.
So this means I’d need to make a monstrous £795,000 investment to bag the necessary 269,491 shares.
Beyond the unlikelihood of having such a sum, there would be tax implications (to put it mildly) if I wanted to spend this much at once on stocks for income.
However, that doesn’t necessarily mean my zero-work dream is gone forever. I could instead build towards it by maximising my annual tax-free Stocks & Shares ISA contribution. This is currently £20,000.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
The ISA route
If I maxed out my ISA contributions every year, and achieved an average annualised 9% return, then I’d reach £795,000 in just under 17 years.
By the way, if I let that build up for 20 years, I’d end up with £1.1m!
Now, 9% is the ballpark stock market average (with dividends reinvested) over the very long term. But that doesn’t mean it’s set in stone. I could end up with less (or more) than that.
Diversity is important
Tesco just reported a bumper Q3 that included the festive period. Like-for-like sales rose 6.8%, prompting it to upgrade its full-year operating profit forecast to £2.75bn. The dividend seems safe.
Despite this, it’s important to remember that no payout is ever guaranteed in future. Just under 10 years ago, Tesco was paying no dividend at all as it worked its way through an accounting scandal. This is the sort of event that can blindside any investor.
Therefore, it’s crucial to build a resilient portfolio of different shares. Fortuantely, that would enable me to invest in other higher-yielding stocks.
For example, insurance giant Aviva is currently sporting a 7.4% dividend yield. Global investment manager M&G is yielding a colossal 9%. Tobacco stocks like Imperial Brands are offering meaty passive income potential. Meanwhile, Vodafone shares have an eye-popping 11% yield. The list goes on.
From such a selection, it should be relatively straightforward to build a high-yield portfolio that pays more than Tesco’s forecast 4.4%. And that would be important for two main reasons.
First, £34,963 won’t get me in 17 years what it does today due to rising costs. I can’t rely on just one stock to keep my income up with the rate of inflation. Second, a high-yield portfolio in which I reinvest dividends would likely get me to my target years earlier.
