£20,000 invested in Tesco (LSE: TSCO) shares three years ago would today (28 April) be worth £38,153, with dividends included. That is a gain of £14,747 from the share price alone, plus a further £3,406 in dividends. It means a total return of around 91%.

It is an extremely impressive outcome for a stock often viewed as a slow‑and‑steady defensive play. But Tesco has benefited from resilient consumer demand, disciplined cost control and the quiet compounding power of its scale‑driven, cash‑rich business model.

The supermarket giant continues to target margin improvements, stronger free‑cash‑flow conversion and ongoing shareholder returns through dividends and buybacks.

So, could investors expect the same sort of returns from here?

Is there any value left in the share price?

It is good to know for the sake of long-term profits that just because a stock has gone up in price, does not mean no value is left in it.

To find out whether there is, I always run a discounted cash flow (DCF) analysis. The model values a business by estimating its future cash flows and discounting them back to the present. The more uncertain those forecasts are, the higher the return investors demand, increasing the discount rate.

Analysts’ DCF valuations vary widely depending on the assumptions used. Under my own assumptions — including an 8% discount rate — Tesco appears 17% undervalued at its current £4.83 price. That implies a fair value of £5.82 — significantly higher than the present price.

If the stock continues to drift toward fair value, this could be a superb buying opportunity if those DCF assumptions hold good.

What about the dividend income?

Tesco’s dividend yield is forecast to rise to 3.2% next year, 3.5% the year after, and 3.9% in 2029.

So, a £20,000 holding now would generate £9,521 of dividends over 10 years and £44,318 after 30 years. The numbers are based on the 3.9% forecast dividend yield as an average, although that can go up and down. It is also based on the payouts being reinvested back into the stock to utilise the supercharging effect of ‘dividend compounding’.

The value of the holding (including the original £20,000 investment) would be £64,318 by the end of 30 years. And that would generate an annual average income of £2,508.

Is this supported by earnings momentum?

Share price and dividend gains are ultimately driven by sustained earnings growth. A risk here for Tesco is the stiff competition in the sector that may squeeze its margins.

Another is any rise in direct or indirect taxation that could force it to raise prices, making it less competitive.

That said, analysts forecast its earnings will rise by a solid average of 6.9% a year over the medium term.

My investment view

My holding in Marks and Spencer means I have sufficient weighting for the retail sector in my portfolio. So I will not be buying Tesco at the moment.

Were it not for this, though, I would do so. It remains the top supermarket in the UK, with good earnings growth forecasts underpinning likely share price and dividend gains. So I think it is worth other investors’ consideration.

My own focus, however, is on bargain stocks with high dividend yields in other sectors.