Stock market

How much passive income can I get if I buy Tesco shares today?

Tesco (LSE: TSCO) shares have a long track record of reliable dividend payments, with only a few blips.

Is this an ideal stock to put in my retirement portfolio? I think it just might.

Tesco may not offer the market’s biggest dividend yield. But a forecast 4.2% may well grow over the years, especially if it grows every year.

But, first, what exactly are profits?

Spread the cash.

Basically, they come from the company’s revenue, after all its expenses. So whatever the firm does not require for reinvestment, working capital, safety cash buffer, etc., is often distributed to shareholders.

Well, this is an ideal case, at least.

Some companies prioritize profit. And they pay them even if they don’t have the earnings to cover them. It can come out of cash reserves, and that can be fine.

Earnings can vary from year to year, and profits can be smoothed out by keeping cash in good years to offset weak years.

Investment Trust

This is what investment trusts do. And that is why some of them have been able to raise their profits for more than 50 consecutive years. But that’s a story for another day.

Some firms, though, continue to pay dividends higher than earnings for years. They can also create large amounts of debt. So, yes, they are effectively borrowing money to pass on to shareholders.

But as long as they can balance the books, shareholders can be happy with the cash. Something has to give, though.

Just look where BT Group And Vodafone Share prices have moved over the past 10 years, while profits have been revealed. Hint: It’s not.

Back to Tesco.

The Tesco dividend is almost twice covered by earnings. And forecasters expect it to stay that way.

Oh, and they predict growing profits to approach 5% by 2026.

So, finally to my question, how much annual income can we get from Tesco shares? Different investors have different amounts of money at different times, so here are a few options.

ISA Allowance

A single ISA allowance of £20,000 invested in Tesco shares and left for 20 years could amount to more than £45,000, which could then pay out around £2,000 a year.

Or, investing £5,000 per year in Tesco for 20 years (at just over £400 per month) could grow to £155,000, and pay out £6,500 per year.

Or a fairly modest £200 per month could still grow to around £75,000 in that time, then earning £3,100 per year.

Risk management

Now, all shares are at risk. Tesco faces competition from ultra-cheap companies such as Aldi and Lidl, which are eating into its market share.

Tesco has also gotten things horribly wrong in the past, expanding where it wasn’t able to pull it off. And competitive pressures can certainly increase.

But I think we can get some nice retirement income by buying stocks like this, with the kind of cash flow and earnings cover that Tesco can boast.

And I think I can come up with a more varied choice than Tesco’s 4.2% average.


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