I’d invest £200 a month in Tesco shares to build £750 a year in passive income

I would ideally like to end up with a portfolio of FTSE 100 shares to generate a passive income of at least £7,500 a year in retirement.

Recently I have bought the highest dividend stocks Lloyds Banking Groupmining giant Rio Tinto and build a house persimmon, but want a minimum of 10 shares in total, and ideally more.

I bought the UK’s highest dividend stocks

I was tempted by the Grocery giant Tesco (LSE: TSCO), which is currently yielding 4.41% annually. That’s comfortably above the FTSE 100 average yield of 3.41%, and management has a solid track record of increasing payouts over time.

So how much do I need to invest in Tesco to generate £750 a year in passive income, which is about a tenth of my total target?

The lowest value of Tesco Corporation in 2019 is 247.5 Euros. To reach my income target I need to buy 6,869 shares for £17,000.

I don’t have anywhere near that amount in cash right now, so I have to spread out my stock purchases over time. If I invested £200 a month in Tesco shares, I would be there for just over seven years.

Investing for retirement is a long-term game, but as I still plan to work for another 15 years, my plan to buy Tesco shares works. I can invest just £100 a month, and still have it before I quit my job.

In practice, I will start generating my target passive income of £750 per year sooner than that amount. This is because most FTSE 100 companies want to increase their dividends over time. Also, I will reinvest everything to take more shares, increasing the power of the dividend.

Are Tesco shares to buy, though? The company’s stock price has fallen 17.7% over the past year. However, long-term investors will do better as it has risen 18% over five years.

Dividend growth is even more impressive. In the 2018 tax year, Tesco paid a total dividend of 3p per share. This rises to 5.77p in 2019, then to 9.15p for the 2020 and 2021 financial years, before rising to 10.9p in 2022.

Dividends should grow over time

City analysts expect a smaller profit this year, to 10.7p. This is disappointing but hardly surprising at such a difficult time. For the full year 2024, analysts expect a rise to 11.2p per share. Today’s dividend is covered twice, so it’s not small.

Management aims to pay about 50% of earnings to shareholders, and much depends on the company’s prospects. Tesco faces tough competition from budget chains Aldi and Lidl, and the cost of living crisis has not gone away. But it has hung on strongly in terms of market share. This is at 27.5%, the same level as four years ago, according to Kantar.

Also, when many fear the threat of Amazon expanding in the UK grocery market, the retail giant is no longer seen as an unstoppable force.

I do not underestimate the challenges Tesco faces. It has repeatedly struggled to expand its profit margin, which is expected to fall from 4.2% today to 3.9%. The price of less than 11.9 times earnings partially reflects this. But if I had the cash I’d buy Tesco shares to help with my passive income goals.