Image source: Getty Images
Over the past year, the Tesco (LSE:TSCO) share price has rocketed. It’s up almost 30% over this period. Even though the rising share price has reduced the dividend yield, it’s currently still marginally above the FTSE 100 average at 3.52%.
Here’s the current forecast for the potential change in yield for coming years.
The past and the future
For a two-year period leading up to 2017, Tesco didn’t pay out any income due to an accounting scandal. If we put that unusual event to one side, it’s paid out dividends continuously for over two decades.
I get why income investors like the stock. The grocery business might operate on tight margins, but Tesco’s been at the top of the tree as far as market share’s concerned for some time now. As a result, it has strong cash generation which enables it to pay out dividends to keep shareholders happy.
Typically, the business pays out two dividends a year. Over the past year, the sum total of the income was 12.5p. Using the current share price, I get the yield of 3.52%. Looking ahead, analysts are expecting the 2025 payments to equate to 13.3p. For 2026, this is forecast to rise further to 14.39p.
Although these figures are just estimates, I should note that over the past few years, the dividend cover ratio has been around 2. This means the dividends being paid are covered twice by earnings from that period. Put another way, I wouldn’t say that the rise in forecasts reflect an unsustainable amount that the business currently would struggle to afford.
Projecting into 2026
Something that’s a little trickier is translating the forecasted dividend per share payments into a percentage yield. This is because the calulcation requires that I use a share price number. Clearly, I don’t know where the Tesco share price will be in 2026.
For an estimate, I’m going to use the current share price. Using 355.1p, the 2025 dividend yield could equate to 3.75%, with the 2026 figure 4.05%.
There are some considerations I need to look at here. It’s not correct for me to compare this to the current base interest rate of 5% and write off investing in Tesco. I expect the interest rate to fall over the next year, potentially down to around 4%, or even below. When thinking about the Tesco forecasts for the coming years, it’s not a bad yield.
Further, I need to think about my total potential profit (or loss). If I buy now and the stock rallies another 30% in the coming year, my total return could end up being much larger than just the income component. Of course, the risk is that the stock falls by 30%, giving me a large unrealised loss!
Boiling it down
Even though the dividend yield forecast for Tesco shares isn’t super high, I think it’s sustainable. I expect it to be slightly above the FTSE 100 average, as well as around the base interest rate. When I add in the potential for share price gains too, I think it’s an attractive option that I’m considering for my portfolio.
