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Tesco (LSE: TSCO) stocks are popular with investors who focus on dividend income.
And the supermarket chain has been paying non-stop dividends to shareholders since 2017.
Meanwhile, city analysts expect total shareholder pay for the current business year to be 10.7 pence per share. So with the share price near 264 pence, the prospective dividend yield is just over 4%.
Dividend Income Harvest
But how much money would you need to invest to generate £1,000 in dividend income from Tesco shares?
My sums show that you would need to buy around 9,346 shares for an outlay of around £24,674. Although the actual figures will vary a bit due to business costs.
However, it is quite a large investment. And many investors won’t have that amount of money available all at once.
And concentrating all the funds invested in one company can increase the risks. In fact, Tesco ran into some trouble a few years ago and proved that it was not immune to operational hiccups.
On top of that, the supermarket sector is competitive. And Tesco’s business has high volume, low margin characteristics.
An economy like that may be vulnerable to future shocks. So it is possible that things could go wrong for the company again in the coming years.
But that assessment doesn’t mean the business will definitely be in trouble. It is equally possible that you can increase your profits and dividends in the years to come and prosper.
However, I would like a dividend yield of at least 5% to compensate me for taking on some of the risk of owning the stock. So last fall was a better time to buy Tesco shares.
And I would also try to mitigate some of the risks of holding shares by spreading my money among several different companies.
Diversification
For example, I would consider names like Unilever, british american tobacco, National Network, IG group, GSK and others. But one of my main requirements would be that my dividend investments be backed by an underlying business with defensive characteristics.
My theory is that defensive companies can make longer-lasting dividend investments over the long term.
That means I would be wary of high-yield stocks in cyclical sectors. And that’s because dividends tend to come and go with such companies.
In fact, cyclicals can be affected by the volatility of revenue, cash flow from earnings, and stock prices. And dividends can be a matter of famine or feast. Although that doesn’t always happen. And some cyclical companies can also grow their operations over time.
However, I see the opportunity in cyclical stocks as more short-term than long-term durable dividend payers.
But all stocks carry risks as well as upside potential, whether cyclical, defensive, or somewhere in between. Therefore, my goal is to further minimize risk by making regular monthly investments in a variety of well-selected and researched stocks. And that’s instead of investing a large lump sum all at once.
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