Various famous adverts of the past have gone along the lines of “I liked it so much, I bought the company!” Tesco (LSE: TSCO) does not evoke especially warm feelings in me as a customer. But as the leading player in the UK grocery market, it has a profitable business I think could yet have a long future. Tesco shares currently offer a dividend yield of 3.7%.
If I wanted to target just under £4,000 per year in Tesco dividends, how much would I need to invest?
Aiming for a dividend target
The most recent annual dividend for each Tesco share was 10.9p.
A more recent interim dividend was declared, at the same level as last year. That suggests that the full-year payout could be held flat.
In that case, to hit my target of £3,980 in annual dividends, I would need to buy 35,514 shares. At the current share price, that would cost me close to £109,000.
Looking for dividend shares to buy
An annual passive income of almost £4,000 in the form of dividends sounds attractive to me.
But I would not want to rely on a single company when it comes to earning dividends. The business could suddenly cancel the payout. Indeed, Tesco itself did that in 2015 and then paid no dividends for several years.
What about finding more attractive dividend options?
Certainly, a number of other FTSE 100 members offer much higher dividend yields. Legal & General has a yield over double Tesco’s – and Vodafone is more than triple.
But yield is not how I choose dividend shares for my portfolio.
My main concern is whether I can find a high-quality business selling at an attractive price. Only then do I start to weigh its dividend prospects.
Looking for bargains elsewhere
In many ways I see Tesco as a high-quality business. It has a well-known brand, large customer base and economies of scale.
It also benefits from operating in a market with resilient demand. But that resilient demand also means other companies spot an opportunity. That is why the grocery market is highly competitive.
That has seen profit margins at retailers such as Tesco falling in the past several decades. With ongoing heavy competition from the likes of Aldi and Lidl, I think pressure on profit margins could persist and may even get worse.
That could be bad for profits and therefore perhaps also dividends. The risk of long-term profit margin pressure, combined with the current share-price deflation, put me off buying Tesco shares for my portfolio.
I think there may well be great companies with stronger prospects, attractive valuations and higher dividend yields elsewhere in the market. I am looking for them!
