Stock market

A 5% yield? Here is the 3-year dividend forecast for Tesco shares.

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Investors who are considering buying Tesco (LSE:TSCO) shares were likely hit by the release of full-year results earlier this month. While it may be a share price increase that is on the cards, I think there could be some solid income when I consider the dividend forecast for the next few years.

Profit history

Tesco usually pays two dividends a year. Mains are announced in April along with full year results. Although there is some variation in the exact amount depending on how good the year was, the amount has been fairly consistent over the past few years.

For example, last year the final dividend was 7.05p per share, with a second payment of 3.85p announced in Q4.

Impressive results for 2023 saw revenue rise from last year, with pre-tax profits of £2.2bn. This figure is significantly higher than the £882m from 2022. As a result, the dividend per share increased from 7.05p to 8.25p.

With a current share price of 286p, using dividends paid over the past year, the dividend yield is 4.28%. This compares to a broader average dividend yield of 3.67%. FTSE 100 Index

A prospect for years to come

Looking ahead, I think Tesco can do well in the coming years. An important factor here is to reduce inflationary pressures. Although it was still higher than during the previous year, the report stated that it “The decline was gradual throughout the year as many global commodity prices fell and we passed on savings to consumers by cutting prices across everyday grocery lines.”

So given the forecasts for this year and next year are for continued declines, this should allow Tesco to capture more demand from customers with an impact on prices. This should also help ease the pressure on profit margins.

Tight margins are a constant threat in this sector. A competitive landscape and thin margins mean that market share (and revenue) can be lost quickly.

Bringing it all together

For 2025, the expected dividend payout will increase to 8.35p and 4.4p, so a total of 12.75p. For 2026, this rises again to 9.1p and 4.7p. If these predictions are correct, using the current share price would increase the yield to 4.9%.

Of course, I don’t know where the share price will be in the future. A higher or lower share price means higher or lower yields. For reference, the stock is up 6% over the past year.

Yet when I consider that the Bank of England’s base rate is expected to fall to 4.75% by the end of this year, the potential yield on Tesco shares looks even more attractive.

I understand that a yield of around 5% is not incredibly high. But at the same time, given the strong financial results and subdued grocery inflation, I think this is a level that is sustainable for the company to continue paying out earnings.

I am thinking of adding the stock to my portfolio and feel that others should consider it as well.

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