£20,000 invested in Greggs shares would generate this much passive income…

Greggs (LSE: GRG) shares are down by around 30% over the past year. That’s obviously disappointing for existing shareholders. But as the share price has fallen, the dividend yield has risen, making the passive income opportunity for new investors more compelling.

Here, I’ll look at how much in dividends a £20k investment in this FTSE 250 stock could generate.

Passive income potential

Greggs’ annual payout has certainly trended in the right direction over time. A decade ago, it was 19p per share. Last year, the dividend had risen to 69p, which translates into a trailing yield of 3.53%.

Based on this, it this means that a £20,000 investment could generate annual passive income of £706. However, forecasts suggest the payout could remain flat this year (at best), before rising just 3% in 2026.

In other words, the Greggs dividend isn’t currently expected to grow too much. Moreover, a 3.53% yield alone isn’t enough to justify buying Greggs shares. That’s because investors are currently being offered higher yields on cash and government bonds.

Investors considering Greggs shares today then would be hoping for the share price to rise over the next few years. And that depends on the company growing its sales and earnings.

Challenging times

This is where the picture has recently become a bit more murky. Like most businesses, the recent tax hikes have forced Greggs to raise prices, which isn’t ideal when many consumers are still cash-strapped. A fragile economy and spikes in inflation aren’t helping.

Despite this, like-for-like (LFL) sales in company-managed shops grew by 2.9% in the first 20 weeks of this year. There was an acceleration in the second half of that period, and almost 50% of locations are now open till 7pm. Total sales were up 7.4% to £784m.

Meanwhile, Greggs is ploughing on with its aim to get to 3,000+ shops. This year, it’s targeting 140-150 net openings, while investing in its supply chain capacity to support that growth.

Interestingly, around a fifth are now franchised shops. Franchising lets Greggs expand more rapidly in travel hubs — petrol stations, motorway services, airports, rail stations — without taking on the full cost or operational burden of every new shop.

The brand has always resonated with customers, and management said its newly launched Mac and Cheese went viral on TikTok. My daughter is one of the fussiest eaters on the planet, but she loves a Greggs corned beef pasty and sausage roll (only as occasional treats, of course).

In my eyes, the company is doing well, considering the challenging macroeconomic environment in the UK. If not spectacular, trading is at least resilient, and many other retailers would love to be in Greggs’ position.

Stock to consider?

Beyond weak consumer spending, one worry I have is the possible future impact of GLP-1 weight-loss drugs like Mounjaro. These might curb consumers’ desire to pop into Greggs for a sugary treat, or impulsively order one of its six-slice pizza boxes off Just Eat or Uber Eats.

For investors interested in Greggs though, the stock might be worth considering. It’s trading for just 13 times earnings, a significant discount to recent years, while offering that 3.5% yield.

At this valuation, Greggs may prove to be a bargain, just like some of the firm’s food.

The post £20,000 invested in Greggs shares would generate this much passive income… appeared first on The Motley Fool UK.

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Ben McPoland has positions in Uber Technologies. The Motley Fool UK has recommended Greggs Plc and Uber Technologies. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.