Investing in dividend shares is one of the best ways to go about making money from the stock market. Yet, I’ve found that some stocks with juicy dividend yields aren’t worth the risk, due to company-specific factors. To help me find better options, I wanted to see if ChatGPT could distinguish between risk and reward when it came to making passive income with a £500 a month investment.
Positives and negatives
To begin with, ChatGPT was smart enough to figure out that the best strategy involved using the £500 each month and building up a portfolio over time. It also recommended that an investor reinvest the dividends to begin with. This is exactly what I would have suggested. The reason for this is that if the income is put back into shares, it can compound and grow at a faster pace. This contrasts with simply spending the dividends when they get paid.
However, what surprised me was the level of yield based on risk tolerance. ChatGPT suggested a conservative investor could target a 2% dividend yield. For a balanced or medium risk level, it suggested a 3% yield, with an aggressive option being 5%.
I think an investor can target higher levels than this. For example, the FTSE 100 average yield is 3.18%, so I’d use this as a benchmark for a steady, low-risk investor. At a medium level with active stock selection I think the yield is closer to 6%, with aggressive options getting closer to 8%.
Finding good options
To highlight how a stock (which I wouldn’t say is super high risk) can still offer a generous yield, an investor could consider the TBC Bank Group (LSE:TBCG). Over the past year, the stock is up 48%, with a current dividend yield of 5.89%.
The financial services group has its primary operations in Georgia and also operates in Uzbekistan. It’s actually the leading bank in Georgia, mostly achieved via having a strong digital banking footprint. Like most traditional banks, it makes money mainly from net interest income. This refers to the difference in the rate offered on deposits versus the rate charged on loans.
In terms of the dividend, I think it’s sustainable given the strong financials in recent years. The full-year net profit for last year was up 15% on the previous year. The group has set a target dividend payout ratio of about 25%-35% of net profit. Therefore, if it can continue to grow earnings, the dividend should follow suit.
One risk is that the bank operates in countries where the political situation isn’t that stable. On the other hand, it’s these more emerging markets where the growth potential is much higher than established places like the UK. In my view, that’s where opportunity is for the future.
ChatGPT said that after a decade of investing £500 a month, an investor could expect between £1.5k and £4.5k a year. Yet, using my reasoning, an investor could build a diversifed portfolio with an average yield of 6%. After a decade, this could yield just under £5k in income for the following year.
