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Food retailers and producers like Tesco (LSE:TSCO) can be the most reliable shares out there for passive income.
As with any stock, they face internal and external threats that can impact profitability. Yet, the stable nature of food demand — we all need to eat regardless of any economic, political, or social crisis that comes along — means dividends on such shares can be far more resilient over time.
That said, this FTSE 100 operator’s dividend record has been chequered over the last decade, as the chart below illustrates:
Plunging sales, balance sheet repairs, and an accounting scandal prompted dividend suspensions in the mid-2010s. Further cuts or cancellations have been avoided, though dividends were paused in 2020, due to the Covid-19 pandemic, and in 2022 as rising costs hammered margins.
Dividend growth
Yet annual dividends have been growing by double-digit percentages more recently. Encouragingly, City analysts are expecting robust payout growth to largely continue through the next three years as well:
| Financial year to February… | Dividend per share | Dividend growth | Dividend yield |
|---|---|---|---|
| 2026 | 14.4p | 5.1% | 3.2% |
| 2027 | 15.9p | 10.4% | 3.5% |
| 2028 | 17.1p | 7.5% | 3.8% |
Based on these estimates, a £10,000 investment in Tesco shares today will yield a total passive income of £1,051 over the period.
Forecasts are supported by recent strong trading at Britain’s biggest retailer. Sales rose 5.1% in the six months to August on improved volumes, pushing adjusted pre-tax profit 2% higher.
Tesco raised the interim dividend 12.9% as a result.
Group earnings are tipped to rise 2% in fiscal 2026, and by an additional 12% and 9% in 2027 and 2028, respectively. This also means dividend cover comes in bang on the safety watermark of two times through the period.
The supermarket chain looks in good shape to meet current City projections, in my view. Dividend forecasts are also supported by the company’s healthy balance sheet (decent cash flows are also supporting a £1.5bn share buyback programme right now).
Are Tesco shares a buy?
But does this all make Tesco a top stock to buy? I’m not convinced.
Tesco’s share price has risen an impressive 22% in 2025, helped by market share gains that have reinvigorated sales. The business has considerable brand power and — thanks to its Clubcard rewards scheme — commands unrivalled customer loyalty. It also knows how to harness the growth of online grocery, as its successful Whoosh delivery service launch illustrates.
Yet the company also faces significant dangers that could wreck future shareholder returns. A chronic cost-of-living crisis in its core UK market still threatens sales of its non-food and household products. The problem is especially high right now, as price-conscious shoppers are attracted to discounters Aldi and Lidl to buy foods and other goods.
This is reflected in Tesco’s falling margins. At group level, these dropped 10 basis points in the first half to a thin 4.6%. There’s only so much price-cutting the company can do to defend sales against its cheaper rivals without decimating profits.
At the same time, Aldi and Lidl are aggressively expanding to win customers, and supermarkets across the industry continue to slash prices. These pose substantial long-term threats I don’t think are baked into Tesco’s meaty valuation — today, its shares trade on a forward price-to-earnings (P/E) ratio of 16.2 times.
On balance, I’d rather buy other FTSE 100 shares for dividend income.
