I want passive income from my investments. And I’ve rarely seen a better time to aim for this than now. So many top FTSE 100 share prices have fallen, boosting those precious dividend yields.
Today I want to examine Tesco (LSE: TSCO). Its forecast dividend yield stands at 5.3%, boosted by this year’s share price weakness. Its forecast price-to-earnings (P/E) multiple stands at a modest 11.4.
The price has fallen 19% over the past 12 months, even after an October pick-up. Anyone who bought at the low point would have snagged a forecast yield of 5.8%.
I consider Tesco to be relatively steady. Demand for the basics of life — like food — tends not to vary so much. Profit margins can be squeezed during tough times, though. Right now, that’s putting pressure on Tesco, as it faces competition from the cut-price cheapies Aldi and Lidl. But market share is holding up.
How to do it
So what would it take to bag £100 per month from Tesco dividends?
With a 5.3% annual dividend yield and a share price of 220p at the time of writing, I’d need 10,300 shares. That would cost me £22,660 to buy today, and I don’t have that much spare cash lying round right now.
Fortunately, I don’t need my passive income today. I’ll be wanting it for later in my life. So I should still have some time to accumulate the investment pot I need.
Start investing now
If I start investing £100 per month in Tesco shares right now, I could reach my goal in a little over 13 years. So 13 years of putting away £100 per month starting now could get me £100 per month in passive income from then onwards, for the rest of my life. Sounds good to me.
This is based on some assumptions. One is that I reinvest all my dividends in new Tesco shares. And I base my sums on the Tesco share price and dividend not changing. In reality, the shares will vary in price. Over the long term, I expect the price to rise, so I’d get fewer shares for my monthly £100 in future years.
Against that, I see a strong likelihood that Tesco’s dividends will grow too. So each share I buy should net me more future cash. On balance though, I’d expect the yield to soften to a slightly lower level.
Real life investing
Still, in real life, I wouldn’t invest a fixed £100 per month. No, instead I’d try to increase it as time goes on. And by doing that, I’d hopefully still be able to achieve my long-term passive income ambitions.
And my monthly Tesco investment would be only part of my long-term plans. Someone, for example, who had £1,000 per month to invest could go for 10 different dividend stocks and target an eventual monthly £1,000 in passive income.
I won’t buy Tesco just now, as I have other priorities. But I have it on my list for a possible future purchase.
My Tesco example isn’t a prediction, and I’ve mentioned the very real risks only in passing. I mean this just an illustration of what could be achieved by investing regularly in dividend shares over the long term.
The post I’d buy 10,300 shares of this stock for £100 in monthly passive income appeared first on The Motley Fool UK.
Alan Oscroft has no position in any of the shares 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 2022