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The UK supermarket industry is characterised by low margins and fierce competition. But Tesco (LSE:TSCO) shares have been a great investment over the last five years.
Investors who bought the FTSE 100 stock five years ago and held on to it are now getting almost 9% of their investment back each year in dividends. And analysts are expecting more to come.
Dividend growth
Over the last half-decade, Tesco has increased its dividend per share by around 44% – or 7.63% a year on average. And analyst forecasts for the next three years are also pretty optimistic.
The company is expected to distribute 14.16p per share to investors in 2026, rising to 17.11p by 2028. Based on the current share price, that’s a 3.92% dividend yield.
| Year | Dividend per share | Implied yield |
|---|---|---|
| 2025 | 13.7p | 3.14% |
| 2026 | 14.16p | 3.25% |
| 2027 | 15.4p | 3.53% |
| 2028 | 17.11p | 3.92% |
Source: Market Screener
It’s worth noting, though, that this is unusually low in the context of Tesco shares. Over the last five years, the stock has routinely traded with a dividend yield above 4%.
That’s a sign investors have some unusually high expectations for the company over the next few years. But with earnings per share growing strongly, could the stock still be a good investment?
Share buybacks
Tesco operates in an industry where demand doesn’t fluctuate much. That’s a good thing when times are tough, but it means things don’t pick up much when conditions are better.
It’s therefore natural to ask where the anticipated growth is going to come from. And there are a couple of obvious sources for investors to take a look at.
One is share buybacks. Over the last five years, Tesco has increased its earnings per share by around 85% and a lot of this has been the result of reducing its outstanding share count.
The sale of its banking division to Barclays should allow the firm to keep doing this. But this isn’t the only source of growth available to the UK’s largest supermarket chain.
Business growth
The supermarket industry is a difficult one for businesses. Despite stable demand, there isn’t much to stop consumers going elsewhere besides a differentiated product line-up or lower prices.
This is a risk, especially with the likes of Aldi and Lidl growing in popularity. But Tesco has been making moves to make its operations more efficient and using the proceeds to keep its prices low.
The firm has had a lot of success with its Clubcard price offers and initiatives based on matching the prices of its discount rivals. And its main competitive advantage is still very much intact.
The retailer’s biggest strength is its scale. Having the largest market share – by some margin – puts it in a strong position when it comes to negotiating with suppliers and this is a big advantage.
Passive income
A leading position in a resilient industry means Tesco could be a relatively solid passive income stock than most over the next few years. But I think the current share price reflects this.
A 3.14% dividend yield rising to 3.92% by 2028 doesn’t leave much in real terms if inflation stays above 2%. So my sense is that income investors have better opportunities to consider elsewhere.
