As energy and food bills continue to jump, passive income has never looked more appealing. That’s because a regular stream of rising dividends from the right UK stocks can help offset inflation (and even outpace it).
Speaking of food bills, FTSE 100 supermarket shares are popular among many income investors. After all, we constantly need to buy groceries, no matter what’s happening with the economy. In theory, this gives these dividends a defensive quality.
As we all know, supermarkets use a pricing strategy to convince shoppers that £9.99 is somehow better value than £10 — despite the 1p difference!
Borrowing the same trick for a bit of fun then, how much passive income would £9,999 worth of Tesco (LSE:TSCO) shares generate by next Christmas?
Passive income potential
Tesco stock has been on a strong run. Indeed, anyone who invested five years ago would have already doubled their money, before dividends.
However, with the share price near a 13-year high, the dividend yield is not spectacularly high (though hardly paltry). It’s at 3.4% on a forward-looking basis.
If Tesco meets forecasts, this means investors should expect just over 21p per share between now and Christmas 2027.
This would include a 15.6p dividend for the current fiscal year (FY27), split between November 2026 and June 2027, and a further interim dividend of about 5.45p in November 2027.
Putting this together then, someone who invests £9,999 today would expect to receive roughly £450 in passive income over this period.
What could derail Tesco’s progress?
Of course, dividends are never ultimately assured. And if its share price struggles, Tesco might turn out to be a disappointing investment, even with dividends.
So, what could go wrong? Well, sales might come in lower than anticipated. This happened in Q1, when UK like-for-like sales growth of 1.8% failed to match market expectations (for about 2.3%). Volumes also slightly disappointed over Christmas.
Are weight-loss drugs like Mounjaro starting to take a bite out of supermarket volumes? After all, usage of these powerful GLP-1 medications have nearly tripled in the UK in just two years, with as many as 2m people now taking them.
According to Worldpanel by Numerator’s survey of 11,500 households, grocery bills fell by an average of £418 in the first year with one GLP-1 user in a household. So this could be a challenge moving forward.
These drugs are fundamentally disrupting how people engage with food and drink, with ripple effects already being felt across grocery and lifestyle, forcing brands and businesses to adapt at pace.
Chantel Kennaugh, Worldpanel
Also, food inflation is an ongoing risk to overall volume growth, as cash-strapped shoppers might further tighten the purse strings.
Basket reallocation
Given this, are the shares still worth considering? I think so, because for now at least, these drugs are expensive, leading some to quit after a few months. People then tend to revert back to older patterns of consumption.
Also, while GLP-1 users are cutting back on certain snacks, they’re also buying protein-rich foods, as well as mouthwash, chewing gum, and hair products to counter side effects. In other words, there’s basket reallocation.
With Tesco’s market share approaching 30%, and the shares trading reasonably, I think this supermarket stock is worth assessing more closely for a passive income portfolio.
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Ben McPoland has no position in any of the companies mentioned.
