Investing £10k in Tesco shares could generate substantial passive income

Investing in dividend stocks is one of the easiest ways to generate passive income. These stocks pay investors a proportion of the company’s profits – in cash – on a regular basis.

Here, I’m going to look at how much a £10k investment earns Tesco (LSE: TSCO) shares can deliver. Let’s crunch the numbers.

Income without effort

The lowest value of Tesco Corporation in 2019 is 251 Euros. This means investing £10k in the supermarket giant will get you 3,984 shares (ignoring trading commissions).

Now for the current financial year ending February 28, 2024, City analysts expect Tesco to pay a dividend of 10.7p per share.

Multiply 3,984 by 10.7p and we get about £426. How much passive income can a £10k investment in Tesco shares make for a year in the near term.

Share price gains too?

Of course, Tesco shares also have the potential to generate capital. A year ago, Tesco shares were trading at 300p. If they return to that level, a £10k investment at the current share price will grow to £11,950.

One broker believes 300p is possible Jefferies. Earlier this month, analysts raised their target price for Tesco shares to 310p from 260p.

There is no guarantee that stocks will return to those levels. For the share price to rise from here, we need to see sentiment towards the stock improve, or earnings per share increase. Share buybacks can help with the latter.

Risk

Now, there are risks to be aware of here, of course. Please note that the dividend estimate of 10.7p I mentioned above is only a forecast. And predictions can be off the mark, at times. There is no guarantee Tesco will pay this level of income for FY24.

Dividend payments can be more or they can be less. Earnings are expected to cover dividends in the short term. So, I don’t think investors can see a lower payout.

It’s also worth pointing out that Tesco’s share price can fluctuate quite a bit. Back in October, the stock fell to close to 200p. We could see stocks return to this level if volatility returns to the stock market.

We could also see the stock fall to that level if the company’s earnings fall short of expectations. Inflation and competition from rivals such as Aldi and Lidl are some of the risks that could affect performance.

Diversification is wise

Because of the risk involved, it would not be smart to invest everything in Tesco. I think investors looking at shares today should look at others as well. By spreading the money in different stocks, it can reduce the level of risk.