Here’s how much income I’d get if I invested my entire £20k ISA into Greggs shares

Mature black couple enjoying shopping together in UK high street

Greggs (LSE: GRG) shares have long smashed the FTSE 250. In the past five years, they’re up 29% against the mid-cap index’s 5.5% return (excluding dividends). Over 10 years, it’s 434% versus a measly 29%!

Speaking as a Greggs shareholder and occasional customer (I’m watching my diet), I’d love to see it reach the blue-chip FTSE 100 one day. Another 35%-45% rise should do the trick. Fingers crossed.

Alongside the tasty long-term share price growth, the iconic baker has served up rising dividends. Right now, the stock carries a forward-looking dividend yield of 2.4%

How much income could that generate in my ISA from a hypothetical £20k investment? Let’s take a look.

Income potential

Analysts currently expect the company to pay out a dividend of 68.2p per share in FY2024. That would be an almost 10% increase from FY2023.

Barring a couple of pandemic-hit years, Greggs has a tremendous long-term record of growing its shareholder payout. For context, it was 10.6p in FY2005.

Based on the current share price of 2,879p, 68p translates into a forward yield of 2.4%, as mentioned. So, putting 20 grand in Greggs shares could net me £473 in dividends inside my ISA for FY2024.

Another 10% dividend increase (to 75.5p) is anticipated for FY2025, which would increase my income to £523. So that would be just shy of £1,000 in tax-free income over the next couple of years.

This is assuming the forecasts are met and Greggs actually pays out, neither of which are guaranteed.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

What’s going on at Greggs today?

In the first 19 weeks of the year, the company’s total sales grew 13% year on year to £693m. Like-for-like sales in its own managed shops (not franchised) was up 7.4%.

Meanwhile, it opened 27 net new shops, increasing its total to 2,500 locations. It’s aiming for 3,000 shops long term across the UK.

Management did highlight the “challenging market“, which remains a risk. When consumers are skint, they’re less likely to head into town shopping. And this reduces the likelihood they’ll pop into a Greggs for a cheeky bite to eat.

Having said that, the firm has done remarkably well to keep growing. It has expanded into airports and supermarkets and is opening shops for longer. Its food is now available for delivery on both Just Eat and Uber Eats.

Looking forward, management maintained its full-year outlook. Revenue is expected to increase by around 11% to £2bn.

Valuation

We know Greggs’ food is good value for money, but what about its stock? Well, it’s currently trading on a forward price-to-earnings (P/E) ratio of 21.

That’s not particularly cheap, especially compared to the wider FTSE 250, which is worth bearing in mind for investors considering the stock.

A committed shareholder

Just as I try to aim for a balanced diet, I also like my portfolio to have diversification. That means I wouldn’t go piling my full £20k ISA allowance into any one stock. Why take the risk?

However, I am committed to adding more Greggs shares to my portfolio on dips. They don’t pay high dividends but I think the firm is set for more growth ahead.

If I didn’t own the stock already, I’d consider buying it today to hold for the long term.

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Ben McPoland has positions in Greggs Plc. The Motley Fool UK has recommended Greggs Plc, Just Eat Takeaway.com, 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.