If only picking the perfect passive income stock were as easy as asking an AI. Out of curiosity, I asked ChatGPT what makes a ‘perfect’ passive income stock. Its answer was relatively thorough.
According to it, the ideal stock for reliable passive income is one that delivers steady, growing dividends while exposing investors to minimal capital risk.
ChatGPT suggested that such a company would have dividends well-covered by earnings and cash flow, with a payout ratio below 70% to ensure sustainability. Personally, I’d say the payout ratio threshold should vary from sector to sector.
It highlighted the importance of a long-term track record of increasing dividends, giving investors both regular income and some protection against inflation.
The AI also stressed that the underlying business should be defensive, operating in sectors where demand is predictable regardless of economic cycles. Examples it gave include consumer staples, utilities, and essential infrastructure. In these industries, companies typically enjoy pricing power and steady revenues. This can help maintain dividends even in downturns.
Financial strength was another key point. ChatGPT recommended companies with moderate debt, consistent free cash flow, and prudent capital allocation, and noted that management should treat the dividend as a priority rather than a discretionary payment.
Valuation also matters. ChatGPT also noted out that even the ‘perfect’ dividend payer could underperform if bought at too high a price.
What are these stocks?
One stock that could fit the bill is Fresh Del Monte. It’s a vertically integrated international producer and marketer of food — like the tins of pineapple you have at home. The yield is relatively modest around 3.2%, but it’s growing.
But there’s another stock, and yes, I’ve talked about it a lot lately too.
It’s Arbuthnot Banking Group (LSE:ARBB). It’s not a consumer staple, utilities company, or essential infrastructure, but there’s a lot I like about it.
It’s a bank, but it focuses on high-net-worth individuals and families, as well as supporting successful businesses. This, coupled with a modest loan-to-deposit ratio, suggests it may be less cyclical than other banking stocks.
That combination could make its earnings more resilient during economic downturns, while still allowing steady growth in more favourable conditions.
| Fiscal Year | Forward P/E (x) | Dividend Yield (%) |
|---|---|---|
| 2025E | 8.2 | 5.9% |
| 2026E | 6.8 | 6.4% |
It’s also got really great metrics. It trades at a significant discount to its peers with a price-to-earnings ratio of 8.2. This is expected to fall to 6.8 times for 2026 based on current estimates.
Likewise, the dividend yield is really rather attractive and way above the sector average. Analysts expect a yield of 5.9% for 2025 and then 6.4% for 2026 — these yields are based on the current share price.
In other words, £10,000 invested today could yield over £1,200 over the next two years. That’s a strong return.
Of course, there are still risks. There’s a large spread between the buying and selling price. What’s more, I think there’s always cause for concern when the current government is short of cash. I wouldn’t rule out additional bank taxes over this parliament.
I certainly think it’s worth considering.
