How tasty a passive income idea is owning Greggs (LSE: GRG) shares?

After all, the popular high street baker has a cash generative business model, large customer base and is popular with a lot of retail investors.

Close to an average yield

At the moment, Greggs offers a dividend yield of 3.1%. That is close to the 3.2% average for the FTSE 250 index, of which Greggs is a constituent member.

At that yield, £10,000 put into Greggs shares today ought to earn around £310 per year in dividends. In fact, it could earn more if Greggs does well and decides to increase its dividend.

But Greggs has had a turbulent time on the stock market in recent years – and that is important for dividend seekers.

The share price is now 29% lower than five years ago.

Over the past year, however, the price has moved up 37%.

So someone who invested £10,000 12 months ago would now own an investment valued at around £13,700. On top of that they would be earning a little over £500 in passive income annually.

Why the difference in income compared to the same amount invested today?

Remember, dividend yield is a function of the dividend per share and the price paid for the shares. A cheaper Greggs share price a year ago means a higher yield today for those who bought then not now.

I think there are better income shares available

Having a yield that is almost in line with the index seems fine to me, but it raises the question of whether owning that share is any better than simply investing in an index tracker.

A tracker would have the benefit of offering more diversification. Then again, the FTSE 250’s one year growth of 11% comes nowhere neat Greggs’ 37% gain during that period.

That said, diversification does matter. No dividend is ever guaranteed and Greggs did cancel its shareholder payout during the pandemic.

That highlights the ongoing risk of its heavy dependence on physical shop locations that can see few customers if there is a pandemic, bad weather or even just a lack of other reasons for people to visit their high street.

Meanwhile, there are plenty of other UK shares that yield much more than 3.1%.

I’m out of Greggs for now

For a while I thought Greggs looked undervalued given its thousands of shops, strong brand and loyal customer following.

But I have recently taken advantage of the strong run up in price to sell the last of my Greggs shares.

The income story is fine but not especially compelling to me compared to some other opportunities.

And at 17 times earnings, I do not think the share is now attractively priced given ongoing risks including higher labour costs, elevated energy prices eating into profits and heavy investment in new centralised production sites.

Fortunately, I think there are other more attractively priced shares in the market now that hopefullly offer me juicier passive income streams.

What income stock do we like better than Greggs Plc right now?

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Christopher Ruane does not hold any positions in the companies mentioned.