Here’s how much I’d need to invest in Tesco shares for £1,000 a year in dividends

Tesco (LSE: TSCO) is a popular stock among investors focused on dividend income.

And the supermarket chain has been paying shareholders dividends without interruption since 2017.

Meanwhile, City analysts expect total shareholder payouts for the current trading year to be 10.7p per share. So, with the share price close to 264p, the expected dividend yield is just over 4%.

Harvest dividend yield

But how much money should I invest to make a £1,000 profit on Tesco shares?

My numbers show that I need to buy around 9,346 shares at a cost of around £24,674. Although the actual figure will vary due to trading costs.

However, the investment is considerable. And most investors won’t have that kind of money.

And the concentration of all the funds invested in one company can increase the risk. Indeed, Tesco has had some problems in the past few years and has shown that it is not immune to operational setbacks.

In addition, the supermarket sector is competitive. And Tesco’s business has the characteristics of high volume and low margins.

Such an economy may be vulnerable to future shocks. So, there could be more trouble for the company next year.

But the assessment doesn’t mean the business is in trouble. You may be able to increase your earnings and dividends next year and grow.

However, I want a dividend yield of at least 5% to compensate me for carrying some of the risk of holding the stock. So late autumn is a better time for me to buy Tesco shares.

And I also want to reduce some of the risk of holding stocks by spreading my money across several different companies.

Diversification

For example, I will consider names such as Unilever, British American Tobacco, National Grid, IG group, GSK and so on. But one of the main requirements is that my dividend investment is supported by an underlying business with defensive characteristics.

My theory is that defensive businesses can make for more durable dividend investments over the long term.

So that means I would be wary of high yielding stocks in cyclical sectors. And that’s because dividends tend to ebb and flow with the company.

Indeed, the cycle can suffer from volatile profits, earnings cash flow and stock prices. And dividends can be famine or feast. Although it doesn’t always happen. And some cyclical businesses can grow their operations over time as well.

However, I see opportunities in cyclical stocks as shorter term than long term dividend payers.

But all stocks carry risk as well as potential upside, whether cyclical, defensive or somewhere in between. So, I want to minimize my risk further by making regular monthly investments into a few well-chosen and well-researched stocks. And that instead of investing a large lump sum at once.