Investing in dividend shares is one of the easiest ways to generate passive income. These shares pay investors a proportion of company profits – in cash – on a regular basis.

Here, I’m going to take a look at how much income a £10k investment in Tesco (LSE: TSCO) shares could deliver. Let’s crunch the numbers.

Effortless income

Tesco’s share price today is 251p. This means investing £10k in the supermarket giant would get 3,984 shares (ignoring trading commissions).

Now for the current financial year ending 28 February 2024, City analysts expect Tesco to pay out 10.7p per share in dividends.

Multiply 3,984 by 10.7p and we get roughly £426. That’s how much passive income a £10k investment in Tesco shares could generate a year in the near term.

Share price gains too?

Of course, Tesco shares could potentially deliver capital gains too. A little over a year ago, Tesco shares were trading at 300p. If they were to get back to that level, a £10k investment at today’s share price would grow to around £11,950.

One broker that believes 300p is possible is Jefferies. Earlier this month, its analysts raised their target price for Tesco shares to 310p from 260p.

There’s no guarantee the stock will return to that level however. For the share price to rise from here, we would need to see sentiment towards the stock improve further, or earnings per share rise. Share buybacks could help with the latter.

Risks

Now, there are risks to be aware of here, of course. It’s worth noting the dividend estimate of 10.7p I mentioned above is just a forecast. And forecasts can be off the mark, at times. There’s no guarantee Tesco will pay out that level of income for FY24.

The dividend payout could be more or it could be less. Earnings are expected to comfortably cover the dividend in the short term though. So I don’t think investors are likely to see a significantly lower payout.

It’s also worth pointing out that Tesco’s share price can fluctuate quite a bit. Back in October, its shares fell to near 200p. We could see the shares revisit this level if volatility returns to the stock market.

We could also see the stock fall to that level if the company’s earnings are below expectations. Inflation and competition from rivals such as Aldi and Lidl are some risks that could impact performance.

Diversification is sensible

Given the risks, it wouldn’t be smart to have everything invested in Tesco. I think investors looking at its shares today should look at others as well. By spreading money across a range of different stocks, they can lower their risk levels.

Credit: Edward Sheldon – The Motley Fool UK

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