ChatGPT thinks these are the best stocks to buy for passive income. There’s 1 big problem

Is ChatGPT a useful tool for investors hunting for passive income from the stock market? Based on his little experiment, our writer isn’t too sure.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Generative AI bots have already taken the world by storm, providing users with answers in lightning-quick time. But are they any good for selecting great stocks to own for passive income? I thought it might be fun to find out.

What I discovered was actually quite worrying.

The usual suspects

My weapon of choice for this little experiment was ChatGPT and my question was simple: “What are the five best stocks to buy for passive income?”

Should you invest £1,000 in Topps Tiles right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Topps Tiles made the list?

See the 6 stocks

In only a few seconds, I was provided with a list of names: M&G, Aviva, Legal & General (LSE: LGEN), Phoenix Group and HSBC.

It was immediately clear that these companies shared a few attributes.

All of the above are members of the FTSE 100 — the index tracking the UK’s biggest businesses by market cap. All are likely familiar to most Foolish investors as well. At least a few are household names.

Perhaps most interestingly, all offer dividend yields of over 6% at the current time. Contrast this with the 3.5% offered by the index as a whole and it starts to look like AI could be a very useful tool when it comes to stock selection.

Spot the difference?

By now, however, you’ve probably noticed something: all of ChatGPT’s picks specialise in providing financial services of some sort. We’re talking the biggest insurance companies and wealth managers around, not to mention a £150bn bank.

I find this frightening.

Imagine if a fresh-faced investor put every penny they had to work in these five stocks. Such overconcentration is very risky, especially if sentiment around the UK (or global) economy sours.

Now, I’m certainly not suggesting that ChatGPT recommended a bunch of absolute stinkers. But it does show the danger of relying on anything other than old-fashioned research to pick investments. After all, the bot had no knowledge of my financial goals or time horizon. Nor did it provide any reasons for why it thinks these stocks are ‘the best’.

Safer picks

Pushed to select one stock to buy from the list above, however, I’d probably opt for Legal & General. Unlike some of ChatGPT’s picks, it has a pretty solid record of consistently distributing dividends over time, at least since the dark days of the Great Financial Crisis. As things stand, analysts are forecasting another bump to the total payout in FY25.

A growing payout is something I particularly look for since it implies that a business is in decent health. This means more to me than going for only the highest-yielding stocks — something the bot didn’t seem fussed about.

However, one needs to be wary. Legal & General’s dividend looks set to only just be covered by expected profit. That can’t carry on for too long or a cut will likely follow.

For this reason, it would be prudent to consider getting exposure to other, unrelated parts of the market to balance out the risk here. Defensive sectors like consumer goods, utilities and healthcare are particularly appealing.

Created with Highcharts 11.4.3Legal & General Group Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

What I’ve learned

Looking ahead, I don’t doubt that I’ll employ AI in some form for researching investments. But I would never dream of using it to build a portfolio on its own.

No one cares more about my money than I do. And that includes the seemingly all-powerful, all-knowing (but really rather reckless) ChatGPT.

But there may be an even bigger investment opportunity that’s caught my eye:

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and M&g Plc. 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.

More on Investing Articles

Investing Articles

Can the Rolls-Royce share price hit £13 in the coming year?

After a stunning couple of years for the Rolls-Royce share price, can it keep up its recent momentum? This writer…

Read more »

Calendar showing the date of 5th April on desk in a house
Investing Articles

Here’s how a £20k ISA could produce £1,580 of passive income in the next year

A Stocks and Shares ISA stuffed with dividend shares can be a lucrative source of passive income. Christopher Ruane explains…

Read more »

Investing Articles

Prediction: 12 months from now, £5,000 invested in Tesla stock could be worth…

Tesla stock has endured a miserable year so far, falling by 29%. Muhammad Cheema takes a look at how it…

Read more »

Investing Articles

See what £10,000 invested in Tesla shares at their mid-December peak is worth today 

As the world absorbs the full scale of Donald Trump's tariffs, Tesla shares are reeling. Investors who bought the stock…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Dividend Shares

2 ‘safe’ LSE dividend stocks to consider as global markets sell off

As global markets experience high levels of volatility due to economic uncertainty, investors are piling into these ‘safe-haven’ dividend stocks.

Read more »

Investing Articles

US stock market rout: an unmissable opportunity for investors?

His tech-heavy portfolio has been smashed by Trump’s tariffs. However, Dr James Fox believes there could be some opportunities in…

Read more »

Investing Articles

After a 13% ‘Trump tariff’ fall, is the Barclays share price too cheap to miss?

Does the Barclays share price fall mean we should all panic and run screaming from the stock market? Nah, of…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 investment trusts to consider for a Stocks and Shares ISA

These two investment trusts have a different focus -- but our writer sees both as worth considering, one more for…

Read more »