Investing in dividend shares is a great way to target a large and sustained second income, in my view. My own portfolio has a major weighting of companies with high dividend yields and robust records of dividend growth. With my Stocks and Shares ISA set up, I can now sit back and watch the passive income roll in.
But let’s not get carried away. Dividends are never guaranteed, and I’ve experienced some dividend disappointments down the years. This is why creating a diversified portfolio of dividend shares is important to smooth out any turbulence at one or two companies.
What could be the best dividend stocks to buy to boost my chances of avoiding future dividend issues? I did what millions of Britons are currently doing, and put ChatGPT on the case.
Sage advice
Before getting to the stocks themselves, ChatGPT gave me some broad tips I should consider when choosing shares to buy.
It said I should prioritise dividend shares with:
- A consistent dividend history.
- Reasonable payout ratios, noting that “if a company is paying out too much of its profit in dividends, the dividend might be at risk in a downturn.”
- Strong cash flows and balance sheets.
- Sustainable dividend yields, noting that “sometimes a high yield equals high risk, or that the market expects a cut.”
I’m sceptical about using artificial intelligence (AI) models for investing tips due to their dodgy reasoning and frequent use of inaccurate information. But ChatGPT’s pointers here are fine.
Now the bad news…
But it fell down (in my opinion) when it came to identifying the best UK dividend stocks to buy.
Among the AI’s picks were British American Tobacco (LSE:BATS), which it praised for its “long history of dividend payments,” and Schroders, which it described as having a “decent” payout record.
But it’s important to consider share price performance as well as dividends. With both combined, British American Tobacco shares have delivered an average annual return of just 5.5%. Schroders — which has kept dividends per share unchanged for the last three years — has delivered an even worse return, of 2.6%.
By comparison, the broader FTSE 100‘s delivered an average annual return of 8.4%. I’m expecting these firms to continue underperforming over the long-term too, with investment manager Schroders in danger as DIY and passive investing grows in popularity.
In the case of British American Tobacco, it has a mountain to climb as the cigarette market continues its terminal decline. Cigarette volumes aer tipped to drop 2% over the course of 2025. Over the long term, there’s a danger that sales of vapes could go the same way, too, as regulators tighten rules on the sale and usage of smokeless products.
A better buy?
I think there are much better dividend stocks out there to consider than these two. Coca-Cola HBC is a dividend growth share I’ve bought for my portfolio. The unmatched brand power of its drinks has supported steady long-term earnings growth, and an annual dividend that’s grown at an average rate of 11.1% over the past decade.
Despite rising costs and competition from popular drinks like Pepsi, I’m optimistic the FTSE firm can continue delivering fizzy returns, underpinned by its strong track record of innovation. Coca-Cola has delivered an average annual return of 11.4% since 2015.
