Dividend stocks rarely make the front pages. And in a week when a sitting Prime Minister prepares for his exit and Westminster unveiled a new defence spending plan, that might be their greatest charm.
While politicians discovered that job security isn’t guaranteed, Tesco (LSE: TSCO) quietly paid its final dividend on 26 June. It tends to do that regardless of who is measuring the curtains in Downing Street.
Passive income
That reliability is the whole point of passive income investing. A dividend arrives whether markets are euphoric or despondent, and reinvesting it buys more shares, which generate more dividends in turn.
The compounding process is slow, unglamorous, and devastatingly effective. The common mistake is to try and speed things along by looking for very high yields.
That can be risky — a 9% payout is often a warning sign of a cut to come. A 3%–4% yield growing at 7% a year is often the better long-term income engine.
Enter Tesco, with its 3.4% dividend yield. Could that be worth considering for income investors seeking stocks to think about buying in July?
What diligent investors will notice about Tesco
Tesco is the UK’s largest grocer, and its market share is now at its highest level in over a decade. And the firm’s scale is its big advantage.
More stores and the chance to reach more customers give the company buying power with suppliers. Smaller rivals just don’t match up.
The Clubcard scheme also gives the firm better data than rivals. Think about how Meta Platforms knows which ads you click on – but with food.
The Aldi price match scheme makes Tesco competitive against the toughest rivals. And people keep coming through its doors in recessions, pandemics, and everything else.
What about margins?
Retail is notorious for tight margins. This is especially true of groceries, where consumer choices are mostly driven by price and value.
It makes inflation a real challenge. And raising prices to offset cost increases risks alienating customers who can easily go elsewhere.
One strategy for dealing with this is to try and offset higher costs with growth elsewhere. And Tesco has done this very effectively recently.
A combination of 4.3% revenue growth and a £1.45bn share buyback programme have boosted earnings per share. And there’s more to come on the buyback front.
A dividend opportunity?
Tesco’s shareholder returns – both dividends and buybacks – are covered by the firm’s free cash flows. That’s a very positive sign.
| Metric (FY2025/26) | Figure |
|---|---|
| Full-year dividend | 14.5p per share |
| Forecast dividend (FY26/27) | 15.6p (+7.3%) |
| Forward yield | ~3.4% |
| Free cash flow | £1.96bn (+11.8%) |
| Buybacks | £1.45bn completed, £750m announced |
At around 459p, a £10,000 investment would buy roughly 2,178 shares. That’s about £340 a year in dividends at the forecast payout.
The real case for buying the stock has nothing to do with inflation, interest rates, or whoever ends up in No. 10. It rests on the firm’s key competitive strengths.
Those include durable scale, dependable cash generation, and a management team committed to returning cash to investors. That was true last July and it’ll likely be true next year.
That’s exactly what dividend investors want from stocks. And it’s why right now looks to me like as good a moment as any to think about buying.
That being said, it’s not the only name worth considering. As we head into July, I’ve got a few growth and income stocks on my radar.
What income stock do we like better than Tesco Plc right now?
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Stephen Wright does not own shares in any of the companies mentioned.
