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Tesco (LSE:TSCO) shares have been a pretty strong performer in recent years. Despite UK discount retailers turning up the pressure, the supermarket giant has cleverly positioned its Clubcard loyalty scheme to keep shoppers flowing through its doors, even stealing market share in the process.
But even income investors have joined in enjoying the spoils. In its 2024 fiscal year, management hiked shareholder payouts by an impressive 11%. Then in 2025, dividends were bumped up by another 13%.
But what are analysts expecting for 2026? And if an investor wanted to earn £5,000 in annual passive income, how many Tesco shares do they need to buy?
Tesco dividend forecast
Following the group’s continued strong results, analyst projections for the full year dividends are currently estimated at 14.34p. Assuming this projection’s accurate, it means Tesco’s heading towards its third consecutive year of raising shareholder payouts. And on a forward basis, it puts the stock’s dividend yield at around 3.2%.
While that’s not the highest yield out there, it’s still a notable improvement versus the FTSE 100‘s current 2.9% average.
However, for investors seeking to earn £5,000 a year from Tesco shares, this level of payout would require buying around 34,868 shares. That’s obviously quite a large chunk and, at today’s price, it will set an investor back around £155k.
It goes without saying that most people don’t tend to have that sort of money just sitting in the bank. Yet at the same time, investors can nonetheless steadily build this large position over time when leveraging the power of compounding.
So the question now becomes, is buying Tesco shares even a good idea?
Bull versus bear
At 28.7% market share, Tesco continues to dominate the UK grocery retail landscape, driven by stronger customer satisfaction and continued strong demand for its premium Finest range of products.
It seems that despite the higher cost of food, more affluent households are willing to open up their wallets for high-quality/higher-margin groceries. As such, Tesco is increasingly gaining more financial flexibility to lower prices for other items on its shelves through special offers or its price-matching scheme.
This unique positioning has enabled Tesco to appeal to both premium and budget shoppers. And this strategy continues work wonders. This latest Christmas period continued to show robust growth at 2.4%, with only its wholesale business, Booker, lagging.
As a result, management’s guidance received a slight upgrade with underlying operating profits expected to land at the upper end of its previously-issued range of £2.9bn-£3.1bn, paving the way for higher dividends.
Having said that, there are still some potential early signs of weakness. While effective so far, management’s strategy may be losing steam with like-for-like sales growth during the latest quarter decelerating. Meanwhile, the group’s financial flexibility could also be under rising pressure with Minimum Wage increases coming into effect in April.
The bottom line
Overall, Tesco shares seem to be a high-quality defensive opportunity with a solid dividend yield on offer. Yet at the same time, today’s valuation suggests that most of the group’s expected future growth could already be priced in. And with looming earnings headwinds, I think it may be worth exploring other passive income-generating companies. Luckily, I’m spoilt for choice.
