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Tesco (LSE:TSCO) stocks have struggled over the past year as inflation has soared. Supermarket shares fell 8%. On the contrary, the FTSE 100 The index rose 5.5% in the same time period.
However, after entering an uptrend in recent months, a sustained recovery could be on the cards for Tesco’s share price. In addition, the stock offers a dividend yield of 4.5%, which comfortably exceeds the Footsie average of 3.7%.
So if you wanted to target £100 per month in passive income, how many shares would you need to buy? We are going to explore.
dividend income
Tesco shares are currently trading at 255 pence each. At the current dividend yield, that means you would need to buy 10,389 shares to earn £100 in monthly passive income.
That number of shares would cost me a total of £26,491.95; That’s a lot to invest in one company at a time, but it shows the kind of investment you’d need to make in the supermarket to earn £1200 in dividends every year.
Now, it is important to note that dividends from any company are not guaranteed, including Tesco. However, the supermarket has an impressive track record in this regard.
The company continued to pay distributions to shareholders during the 2008 financial crisis and the 2020 stock market crash caused by the onset of the pandemic. Also, the dividend hedge remains strong at around twice earnings.
Actually, I don’t have the amount of extra money I would need to invest in Tesco to secure an annual passive income of £1200. However, I am happy to have a lower income stream from the stock as I regularly invest in other dividend stocks to diversify my portfolio.
The outlook for Tesco shares
Encouragingly, Tesco’s third quarter results were largely positive. Group retail sales increased by 5.7% compared to the same period in 2021/22. The company reconfirmed its FY22/23 guidance for adjusted retail operating profit of £2.4-2.5bn and retail free cash flow of at least £1.8bn.
Furthermore, there is growing speculation that the supermarket could divest its banking arm at a asking price of £1bn. This could be good news for Tesco’s share price, as it allows the company to focus on its core business offering and gives it scope to remain competitive with German discount brands Lidl and Aldi.
At the moment, Goldman Sachs is conducting a review of the proposed sale. I don’t expect there to be a quick move on this front, but it’s something I’ll be watching closely in the coming months.
There are a number of risks that the supermarket faces. Inflation continues to put pressure on the company’s margins, aggravated by increasingly fierce competition in the sector. Also, I think the debt burden the business is carrying seems too high.
Should I buy this stock?
Overall, I think Tesco is heading in the right direction, but there are a number of challenges that are clouding the outlook. Given the risk/reward profile, I will continue to hold the Tesco shares I own, but I am not rushing to buy more at this time.
Although the prospect of earning £100 in monthly passive income from supermarket shares is enticing, I’d rather aim for that sum from a diversified mix of dividend stocks, rather than concentrating my portfolio too heavily on Tesco shares.
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