I’m looking to fill up this year’s Stocks and Shares ISA, and building a lifelong passive income is my priority. I’ll do that by investing in FTSE 100 and FTSE 250 shares, which pay some of the most generous dividends in the world.
I’m always on the lookout for top UK income stocks, so decided to ask ChatGPT to design what I called the ultimate five-stock passive income ISA, with a minimum yield of 5%.
I’d never use a chatbot to pick stocks for me. All too often ChatGPT supplies outdated or incorrect data, and makes daft or dangerous assumptions. Investors have to make their own decisions.
FTSE 100 dividend stars
The robot started by throwing the three biggest FTSE 100 yielders at me – Legal & General Group, Phoenix Group Holdings and M&G. Nothing wrong with them individually, as they yield between 7% and 8%, well above my 5% target. But they’re all in the financial services sector, and performances have been similar. I hold them as part of a 20-stock portfolio, but would never bung all three into a five-stock ISA. Diversification’s vital.
I asked ChatGPT to replace Phoenix and M&G. It started to hallucinate. Its suggestion? Defence stock BAE Systems. This is another stock I hold, and its shares have done brilliantly of late, soaring 75% in a year. But BAE’s trailing yield is just 1.6%, well short of my target criteria. ChatGPT squares the circle by wrongly claiming it yields 5%. I don’t know where it got that from.
Its other replacement was cigarette maker Imperial Brands (LSE: IMB). I don’t buy tobacco stocks, but ChatGPT wasn’t to know that. But I do admire it for the brilliant dividend income it pays, and the impressive share price growth mustered, despite stringent regulation and the welcome long-term decline in smoking.
The Imperial Brands share price is up 16% in the year, and 90% over five. Yet it still yields a solid 5.3% and here’s the most surprising thing. It looks cheap, with a price-to-earnings ratio of just 9.6, roughly half the FTSE 100 average.
Many people dislike big tobacco, but it’s been a brilliant investment this millennium. Rival British American Tobacco may also be worth considering.
ChatGPT also threw power giant National Grid at me, claiming it yields 6%. Correct number: 4%. Like I said, don’t bet the farm on a bot. Personally, I don’t fancy National Grid because it’s spending tens of billions on the green energy transition, and the cost could eat into cash flows.
Finally, ChatGPT named FTSE 250 investment trust Foresight Environmental Infrastructure. It now yields a bumper 11.2% (ChatGPT says 6%) but the shares are way too volatile for my liking. It wouldn’t want that anywhere near my ultimate passive income ISA.
ChatGPT’s shown its limitations here. Investors need to pick their own stocks, according to their own criteria, balancing the need for dividends and long-term share price growth. There are plenty of fabulous income stocks out there, so get digging. And check the facts!
