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Should I buy Tesco shares for my Stocks and Shares ISA today?

Rupert Hargreaves
·3-min read
3d illustration of many red arrows pointng on the left and a green one pointing on the right side of the image.
3d illustration of many red arrows pointng on the left and a green one pointing on the right side of the image.

I’m looking for high-quality, defensive investments for my Stocks and Shares ISA. With that in mind, I’ve recently been taking a closer look at Tesco (LSE: TSCO) shares.

Stocks and Shares ISA investment

Stocks and Shares ISAs come with some unique qualities which makes them the perfect instruments to hold defensive income investments. For example, any additional capital gains or income earned isn’t taxable. This is especially desirable for higher and additional rate taxpayers.

In my opinion, investors should hold all income investments in one of these tax-efficient wrappers. And that could include Tesco shares.

The supermarket retail giant reduced its distribution to investors several years ago when it was dealing with a major accounting and debt crisis. However, recent progress in reducing debt and improving profit margins has led management to reinstate the distribution.

The company is forecast to yield 3.5% this year and 4% for 2022. Based on these projections, I think the investment could be an excellent addition to any Stocks and Shares ISA. Indeed, it would be incredibly difficult to achieve the same rate of interest from a high street bank account. Even the FTSE 100 entity only offers an average yield of around 3%.

But what about growth?

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Can Tesco shares grow?

As a defensive income investment, I think Tesco looks highly desirable. Unfortunately, when it comes to growth, the company could leave much to be desired.

The company is the largest supermarket retailer in the UK. That comes with advantages but disadvantages as well. Consumers will always need food and drink, and Tesco is there to supply those needs.

However, demand for these products tends to grow at a relatively modest rate. For example, the annual growth rate of food and drink retail sales in the UK averaged around 1% between 2014 and 2018.

As such, I think it’s unlikely Tesco shares will achieve the sort of impressive capital growth that’s available in other sectors, such as technology.

Still, I think the company’s most attractive quality as an investment is its defensive nature. As I noted above, there’ll always be a demand for food and drink in the UK. This suggests Tesco sales won’t slump suddenly or the group will find itself struggling to locate customers.

So, even though Tesco shares may not be the most exciting investment, I reckon the firm’s defensive qualities could make it an excellent addition to a Stocks and Shares ISA.

Defensive income

We’ve seen this year how defensive Tesco really is. The group’s stores continued to trade through 2020’s harsh retail environment, earning profits for investors. This performance suggests that whatever happens to the UK economy in the near term, Tesco shares will continue to push on. And even if the stock doesn’t move for the next decade, shareholders will be able to pick up that 4% dividend yield.

The post Should I buy Tesco shares for my Stocks and Shares ISA today? appeared first on The Motley Fool UK.

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Rupert Hargreaves does not own any share mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020