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Tesco (LSE: TSCO) shares don’t offer the biggest yield on the FTSE 100, but they still serve up a pretty decent rate of income.
Right now, the trailing yield stands at 3.83%, a touch above the FTSE 100 average. That figure is a little misleading, though. As share prices climb, yields naturally fall, and the Tesco share price has been rising steadily.
Over the past five years, Tesco shares have gained more than 50%, with nearly 25% added in the last 12 months alone. In today’s troubled market, that feels like a strong performance.
Even after getting caught up in the recent trade tariff worries, the shares bounced back fairly quickly.
Can this stock still climb?
Being firmly focused on UK consumers gives Tesco some insulation from global ructions, although it could suffer as shoppers feel the pinch. The supermarket sector remains locked in a fierce price war, with Aldi and Lidl long causing headaches and now Asda threatening a fresh round of discounting.
With Tesco shares set to go ex-dividend on 15 May, anyone looking to secure the next payout would need to own them before that date. The payment of 9.45p per share is scheduled for 27 June.
Investing £5,000 at today’s price of just under 360p would buy around 1,389 shares, producing a dividend of £131.25 next month. Combined with November’s interim dividend of 4.25p, the total haul for the year would come to around £190.
It’s not life-changing money but building wealth from dividend stocks isn’t an overnight job. The gains slowly compound and grow, with any share price growth on top.
Buying just before the ex-dividend date is no free lunch. Share prices usually dip on the day, reflecting the payout leaving the business. However, I would still rather buy before the deadline and bag my shareholder payout, than narrowly miss out.
The supermarket giant had some good news in its recent results too. Group sales rose 3.5% to £63.6bn, while like-for-like sales grew 3.1%, including a 4% rise in the core UK business. Group adjusted operating profit climbed 10.6% to £3.1bn.
Regular dividends and growth
Management struck a more cautious note for the coming year, warning that profits could fall to somewhere between £2.7bn and £3bn. The cost of doing business is rising sharply across the board, with Labour hiking the National Living Wage and employer’s National Insurance from this month.
Tesco has narrow margins of less than 4%, and will have to absorb these extra expenses at an already tough time.
The 13 analysts publishing one-year share price forecasts have produced a median target of just over 385p. If correct, that would suggest a modest rise of around 7.6% from today’s price. Combined with the dividend yield, that could deliver a total return of around 11%. Hardly spectacular, although broker forecasts should never be taken too seriously.
Nine of the 16 analysts rating Tesco over the past three months have called it a Strong Buy, with a further three saying Buy. Only one said Sell.
After a solid run, I think Tesco is well worth considering for a balanced portfolio of FTSE 100 shares. Staying number one grocer won’t be easy, but Tesco has shown it knows how to fight for its place.
