Since the beginning of the fiscal year (6 April), I’ve been looking for stocks to buy with my new ISA allowance, specifically those that pay me a healthy dollop of passive income just for owning them.
For a giggle, I decided to see what ideas ChatGPT could offer.
The usual suspects
Rightly recognising that there’s no such thing as a perfect stock, the AI bot actually highlighted five potential options. The first four read like a who’s who of income shares:
- M&G
- Aviva
- British American Tobacco
- BP
All of the above feature in the FTSE 100; all currently offer above-average dividend yields, with the lowest being 4.6% (BP). However, ChatGPT’s fifth suggestion — insurer and asset manager Legal & General (LSE: LGEN) — was also the one it labelled as the best UK dividend share overall.
This isn’t just a high-yielding stock. At 8.2%, it’s the highest-yielding stock in the index. Moreover, this is a company with a great record of raising the amount of cash it returns every year.
What’s not to like?
All income, no growth
Well, my grumble with Legal & General is that the shares have technically gone nowhere for ages.
Sure, there’s been volatility along the way. But any owners logging in to view their portfolio for the first time since April 2021 won’t have seen much change at all in what their stake’s worth. In sharp contrast, many top-tier stocks are up massively in value.
Now, I could argue that this might not matter to the average income seeker. That person may simply be looking for a way to supplement their pension and/or help pay for a few expenses.
But that’s my concern in a nutshell. The fact that this stock has performed poorly in recent times has put a lot of pressure on that passive income to pick up the slack. And we know that dividends can never be guaranteed.
Like others in this space, the £15bn-cap is very sensitive to economic shocks and interest rate speculation. After all, any fall in market sentiment could impact the money it makes in fees. For evidence of this, check out what happened to the share price in March when the US/Iran war kicked off.
It’s also worth noting that Legal & General’s total dividend hasn’t been covered by profit over the last few years. Topping it up from reserves can only carry on for so long.
Worryingly, the AI bot failed to mention any of this in its response. This goes some way to showing why I never blindly rely on ChatGPT (or any alternative) to pick stocks for me.
Better times ahead for this passive income powerhouse?
As part of a diversified portfolio, I reckon Legal & General shares warrant attention. However, I’d like to see a bit of mojo in its share price before long to complement that magnificent income stream. While it may have paid less in dividends, a simple FTSE 100 tracker would have outperformed the financial services provider in the last five years, assuming that money had been reinvested.
Whether and when that spark arrives is anyone’s guess. But on an optimistic note, further growth overseas combined with the massive structural tailwind that is an ageing population could see more investors taking an interest.
