Yield-hungry investors like me are always looking to add high-quality dividend shares to our retirement portfolios. This week, I decided it was time for a deep dive on the Tesco (LSE: TSCO) dividend.
Stocking up on dividends
The dividend yield is one of many commonly used relative value ratios.
Tesco’s current 4.0% trailing yield is calculated by simply taking the last 12-month dividend per share of 10.90p and dividing it by the current £275.90 share price.
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One of the key characteristics I’m looking for when building my retirement portfolio is reliability. Dividends are ‘sticky’, meaning once companies declare and/or increase them, shareholders come to expect them, and boards will try to maintain them.
However, being successful in the supermarket business isn’t easy. That’s been especially the case in the last few years as they’ve had to contend with higher wages, higher input costs and disrupted global supply chains.
Despite all of this, the Tesco dividend has grown from 5.77p in FY2019 to 10.90p in FY2023. In addition, the company is forecasting FY2025 sales of £70.3bn, up 6.8% on FY2022 figures.
I’m seeing a well-known, robust business with strong consumer demand, but I am aware of some key risks. I need only look at FY2016 and FY2017 when Tesco slashed its dividend to zero.
Wage inflation and energy costs remain a threat despite some respite in 2024. In particular, the service sector remains one to watch as workers seek higher pay to offset higher costs. This can greatly impact the fundamental cost structure for the likes of Tesco.
There’s the ever-present threat of competition and disruption in the sector from cheaper alternatives such as Aldi or digital disruptors like Amazon. The consumer staples sector is fiercely competitive, and companies must continue to innovate in order to protect and expand market share.
Whilst cleared of profiteering in mid-2023, the UK regulators are likely to keep a close eye on the supermarkets. Being so well known and so publicly facing does present potential regulatory threats for the business in the future.
Super-charging my retirement
All in all, I do like the look of Tesco. It fits my current risk-return profile as a large-cap, market leader that has shown a willingness and ability to pay dividends.
While risks to my investment thesis remain, the 4.0% dividend yield is nothing to sneeze at. To generate a £15,000 passive income at that yield would require nearly £380,000 in shares.
Daydreaming of my future retirement, I ran some quick numbers. In a very simple scenario, starting with £25,000 today, reinvesting a 4.0% dividend yield and adding £5,000 extra each year, I could theoretically have a portfolio worth £380,970 in 30 years’ time.
Of course, I didn’t include potential changes to yields, the dividend being cut altogether, capital losses and the like. But it does help me feel like that dream retirement portfolio could be within reach!
