A risk here is any slippage in its transition away from tobacco products and to nicotine substitutes. This could give an advantage to its competitors doing the same thing. Another would be any new litigation arising from one of its new products, which could lead to significant costs.

However, analysts forecast that its earnings will increase by a solid 4% over the medium term. So what sort of returns from dividends and share price can I expect from here?

Consistently rising dividends

Imperials Brands increased its annual payouts in each of the past five years, from 139.08p in 2021 to 160.32p in 2025. These generated average annual dividend yields of 8.9%, 7.6%, 8.8%, 7.1%, and 5.1%.

The declining recent yield — despite the hike in annual payout — underlines that these returns can change over time.

That said, analysts expect dividend payouts to rise to 168.7p this year, 177.2p next year, and 186.9p in 2028. These would generate respective dividend yields of 5.5%, 5.8%, and 6.1%.

By contrast, the present FTSE 100 average is just 3.1%, and the ‘risk-free rate’ (10-year UK gilt yield) is 4.9%.

How much can be made?

The standard investment cycle for long-term investors is around 30 years. It begins with first investments at around 20 and early retirement options at about 50.

After 10 years on the forecast 6.1% yield, investors would make £16,752 on an initial £20,000 holding. This assumes that the dividends would be reinvested to harness the extraordinary power of dividend compounding.

After 30 years on this basis, the dividends would increase to £104,101. Including the initial £20,000, the total value of the holding would be £124,101.

And that would generate an annual income of £7,570.

A share price bonus too?

I always buy stocks that look underpriced to their ‘fair value’. The number represents the true worth of the underlying business, while price is simply whatever the market will pay at any stage. The key point here is that asset prices tend to converge to their fair value over time. So knowing and quantifying the difference between the two is crucial for long-term investors’ profits.

In Imperial Brands’ case, a discounted cash flow analysis — including an assumed 8.8% discount rate — shows the shares are 41% undervalued at their current £30.54 price.

Some analysts’ DCF modelling is more bullish than mine, others more bearish, depending on the variables used. However, based on my DCF, the fair value for the shares is around £51.76 — substantially higher than today’s price.

So that gap suggests a potentially terrific buying opportunity to consider today if those DCF assumptions prove accurate.

My investment view

I have held the stock for some time now, periodically adding to it as prices dip. Given its recent price drop, its solid forecast earnings growth, and its extreme undervaluation, I will be adding to my holding soon.

I have also identified other similar stocks with even higher dividend yield forecasts in the coming years.

The post I’m targeting £7,570 in yearly dividends from £20,000 in this FTSE income heavyweight appeared first on The Motley Fool UK.

A value stock is a company whose shares trade cheaply compared with its earnings or assets. I’ve been running through a list of blue-chip shares ranked by their price-to-earnings (P/E) ratios and plenty of top companies look cheap today.

A word of warning though. Just because a stock has a low P/E doesn’t automatically mean it’s good value. It could just as easily be a trap.

Buying cut-price shares

I hold two shares with extraordinarily low P/Es in my SIPP. Trainer maker JD Sports Fashion trades on just 6.6 times earnings, while British Airways owner International Consolidated Airlines Group sits at 6.8.

JD’s problems pre-date the Iran conflict as the cost-of-living crisis hammered sales. With oil climbing, that’s unlikely to change. I’ll have to be even more patient with this one. By contrast, IAG has been flying. Its shares are up 154% over three years and 20% over the last 12 months. Today, it’s hit by Middle East airspace closures and rising fuel costs. I think both value shares are worth considering, but only with a long-term view.

Several other FTSE 100 names also suggest value. Budget airline easyJet trades on a P/E of 7.1, Hikma Pharmaceuticals is on 7.8, NatWest Group on 9.1, gaming firm Entain on 9.3, Barclays on 9.5 and cigarette maker Imperial Brands on 10.1.

NatWest and Barclays tempt me. Their shares have been on a remarkable run, but investors fear the rally may have gone too far. Others worry the artificial intelligence bubble and global tensions could drive up loan impairments. Barclays has fallen 12% in a month. It’s now top of my shopping list.

Imperial Brands Group is a top income play

I’ve written about the banks a lot recently, so let’s look instead at Imperial Brands Group (LSE: IMB). Tobacco stocks are exactly the sort of defensive shares that can ride out geopolitical turmoil because smokers rarely abandon their habit during a crisis. The shares have slipped only 3.2% over the last month.

Long-term investors have still done extremely well. The shares are up 14% over one year and roughly 130% over five. Dividends come on top of that.

Today there’s a solid trailing dividend yield of 5.1%. Forecasts suggest that could hit 5.3% in 2026 and 5.6% in 2027. Some investors avoid tobacco stocks on moral grounds. But those who buy them have historically been well rewarded through both dividends and capital growth. That’s remarkable given that smoking rates continue to fall in many countries. Newer products such as vaping have opened additional revenue streams, although regulation and health concerns remain constant risks.

Imperial Brands still looks worth considering. It appears to combine income, resilience and value. We haven’t quite hit that once-in-a-decade buying opportunity for value shares. Markets haven’t fully capitulated yet. But it won’t take much bad news to change that. Even today, there’s already plenty of value out there for those who look.

The post Is today’s market volatility a once-in-a-decade chance to buy UK value stocks? appeared first on The Motley Fool UK.

The real gems are the high-yield names with earnings that do not wobble when the economy does. These are the sorts of businesses that keep paying up even when sentiment turns sour.

Imperial Brands (LSE: IMB) has long looked to me like it perfectly fits this bill.

Key dividend drivers

Imperial’s business model is essentially a cash‑generation machine, and its 2025 results underline that strength once again. Price increases of 5.4% in its combustible portfolio more than compensated for falling volumes, keeping income flowing reliably.

The company’s five core markets — the US, Germany, UK, Spain and Australia — still deliver the bulk of adjusted operating profit. This anchors earnings in regions where performance is highly predictable, reinforcing the durability of future cash flows.

Additionally positive is Imperial’s tight cost control and ongoing simplification efforts. These helped drive adjusted operating profit up 4.6% to £3.99bn, nudging past the £3.98bn consensus. Those efficiencies also fuelled a 12% jump in free cash flow to £2.7bn, while adjusted earnings per share climbed 9.1% to 315p.

Meanwhile, next-generation products — mainly nicotine alternatives — delivered a 13.7% revenue rise over the year. This adds a steadily growing earnings layer for the years ahead.

A risk for Imperial is that the transition to these smoke-free products is delayed, allowing competitors to gain ground. Even so, analysts still forecast Imperial’s earnings will grow 4% a year to end-2028. And it is this that ultimately underpins any firm’s dividend payments over the long run.

Dividend outlook

Over the past five years beginning in 2021, Imperial has increased its dividend from 139.08p to 160.32p in 2025. This generated respective standout average annual dividend yields over those years of 8.9%, 7.6%, 8.8%, 7.1%, and 4.9%.

The current 5% dividend yield reflects the fact that these annual returns can go down as a share’s price rises, despite increases in yearly payouts. However, it still compares very favourably to the current FTSE 100 average dividend yield of just 3.1%.

That said, analysts forecast that the dividend will rise to 168.7p this year, 177.2p next year, and 186.9p in 2028. These would generate respective yields of 5.1%, 5.4%, and 5.7%.

How much passive income?

£20,000 — the same as I hold in the stock — would currently buy 607 shares in Imperial. Over 10 years on the forecast 5.7% yield, this would give £15,318 in dividends. This also assumes these payouts are reinvested into the stock to benefit from the turbocharging effect of ‘dividend compounding’.

On the same basis, the dividends would increase to £90,132 after 30 years. Adding in the original £20,000 investment, the holding would be worth £110,132 by then. And this would pay a yearly passive income from dividends of £6,278, assuming the dividend doesn’t go down at any point!

My investment view

I am optimistic Imperial’s dependable cash generation will keep its dividend growing steadily.

While the shift toward smoke-free products carries execution risk, the forecast earnings growth still supports a compelling long-term income case to me.

Consequently, I am happy to keep my holding in the firm and believe it well worth the consideration of other investors.

But these are not the only high-yielding passive income shares that have caught my eye in recent weeks.

The post Investors could target £6,278 a year in passive income from just 607 shares in this under-the-radar FTSE gem! appeared first on The Motley Fool UK.

How’s this done? And how much money do investors need to make it happen?

Calculating targets

By relying on simple FTSE 100 index funds, investors today can expect to earn a yield of close to 2.9%. However, by being more selective and crafting a custom portfolio, it’s possible to earn closer to a 5% dividend yield each year without taking on too much additional risk.

If the goal is £1,500 a month, or £18,000 a year, then at a 5% payout, a SIPP would need to be valued at £360,000 – more than double the average size of UK pension pots.

Obviously, this is quite a large chunk of change. But for those who can spare £500 a month from their salary, it’s a threshold most people can reach.

Don’t forget, SIPPs offer tax relief. So for anyone paying the basic rate of income tax, every £500 deposit is topped up to £625 by the government. And assuming an investor’s portfolio matches the stock market’s average 8% annualised return, investing £625 each month will compound into a £360k pension pot in roughly 20 years when starting from scratch.

This goes to show that even someone who’s just turned 48 with no pension savings can still drastically improve the quality of their retirement lifestyle.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Finding 5%-yielding stocks

Earning a market-beating yield requires a bit of investigative work. Higher dividend yields are often a reflection of the risk attached to a business. That’s actually why so many double-digit-yielding stocks often end up announcing payout cuts.

However, there are always some exceptions. And looking at the FTSE 100 today, one of these exceptions might be Imperial Brands (LSE:IMB) with its near-5% payout.

Not all investors are keen on tobacco stocks. But this moral objection, while understandable, organically lowers interest in tobacco stocks, creating more attractive valuations and, in turn, higher yields.

That’s proven quite advantageous for income-seeking investors who’ve been earning a high yield for years, backed by dividends that have been getting hiked every year since the pandemic. And with the addictive nature of its products unlocking substantial pricing power, this pattern isn’t expected to change anytime soon.

However, even with these favourable dynamics, dividends aren’t guaranteed. Increasingly strict regulations combined with a steady rise in consumer health consciousness are seeing a structural decline in tobacco consumption. And even Imperial Brands has seen its cigarette volumes start to shrink.

Management isn’t blind to this shifting landscape and has been aggressively investing in a new portfolio of ‘healthier’ products. And while these remain a relatively small part of the revenue stream today, it’s nonetheless expanding rapidly with the long-term aim of becoming a dominant source of income to offset the decline of traditional tobacco.

Whether Imperial Brands will be successful in this transition is where the uncertainty lies. But with a fairly undemanding valuation, this could be a risk worth considering for SIPP investors seeking passive income.

The post How much do you need in a SIPP to aim for a £1,500 monthly passive income? appeared first on The Motley Fool UK.

Data shows that dividend-focused indexes like the FTSE UK Dividend+ have lagged behind the broader market. For the past decade, it delivered a 30% lower total return than the FTSE 100 and FTSE 250 combined.

This is a real blow, especially for those hoping to supercharge a retirement portfolio through dividend reinvestment. By prioritising dividends, they may have lost out on the best gains.

But that situation looks to be changing, offering a once-in-a-decade opportunity for investors to capitalise. In 2025, the dividend index outpaced the top 350 FTSE-listed stocks by 1.3 times.

Could this be the start of an income stock resurgence?

UK stocks driving the surge

A ‘perfect storm’ of conditions helped send dividends stratospheric in 2025 — high interest rates, geopolitical unrest, and surging demand for commodities. These factors helped boost both finance and mining — two sectors known for their generous dividends.

Almost all banks, insurers, and miners enjoyed exceptional growth, boosting the total return on the FTSE UK Dividend+ index. Its top holding, Rio Tinto, returned 48% to shareholders, while major banks HSBC and NatWest returned 23.6% and 32% respectively.

A controversial pick

Finance and mining aside, another sector looks highly promising for dividend growth over the coming three years: tobacco. While British American Tobacco remains a leader in the field, key rival Imperial Brands (LSE: IMB) is looking increasingly attractive.

Naturally, tobacco stocks may not be everybody’s cup of tea – particularly as global smoking regulations tighten. There’s a growing risk that complete smoking bans in major cities could decimate key revenue streams.

But there’s also a strong argument that the shift toward less-harmful products is a more effective route than outright prohibition. These so-called ‘next-gen’ products (NGP) have delivered double-digit revenue growth for Imperial, narrowing losses toward breakeven and complementing core tobacco pricing power.

The company targets explicit 4% annual dividend growth for the next three years. This is supported by full-year 2026 forecasts of 8%-9% earnings growth and 3%-5% adjusted operating profit growth. Its dividend coverage is also more than sufficient, with a payout ratio of just 63.8% and 2.13 times cash coverage.

Other options

Strong dividend growth aside, many investors may be unconvinced by the less-harmful product narrative of tobacco. For those seeking dividend opportunities with a healthier angle, both Aviva and Primary Health Properties also deserve a closer look.

Each boasts strong dividend forecasts in the coming three years, with Aviva offering mid-single-digit growth guidance and Primary Health dedicated to its 30+ year unbroken growth streak.

With the FTSE UK Dividend+ Index hitting new highs after outpacing the FTSE 350 in 2025, there may be a rare once-in-a-decade chance to benefit. Many of its cash-rich dividend giants yield 5%+ and offer defensive income with 4%+ growth forecasts through 2028.

Amid rate cuts and overseas inflows, targeting sustainable payouts at fair valuations is a popular strategy to compound wealth for retirement.

The post Dividend-paying UK stocks: a once-in-a-decade chance to grow wealth? appeared first on The Motley Fool UK.

I grabbed that ever eager-to-please invention, ChatGPT, to give me a few pointers. I asked it: “What are the FTSE 100 hidden gems for 2026?“

While ChatGPT did supply me with some food for thought, I’ll firstly point out that large language models are far from reliable for financial advice. This was conspicuously evident in its own answer…

Its first suggestion was Intercontinental Hotels Group but, apropos of nothing at all, it started referring to it as Associated British Foods. The talk of Holiday Inn margins shifted seamlessly into the strong cash generation of Primark. Holiday Inn is an Intercontiental Hotels Group brad, while Primark is an Associated British Foods brand.

ChatGPT really put the ‘artificial’ into artificial intelligence with that one.

Bouncing back

As for the more coherent choices, while I would say NatWest (LSE: NWG) is more of a household name than a hidden stock, it might fit the gem part of the criteria.

It was not to long ago the bank was weathering a crisis. Its subsidiary, Coutts, shut down the bank account of potential future PM Nigel Farage on dubious grounds, causing a media firestorm.

The firm bounced back handsomely. The shares are up 205% in the last two years. I’ve been bullish on banks for a while and think NatWest could be well-positioned after the government recently fully exited its stake.

A second choice is one of the big tobacco stocks, Imperial Brands (LSE: IMB). While some may want to steer clear for ethical considerations of investing in a tobacco producing business – and the decline of cigarettes is a huge risk for the future – there are a few interesting aspects to this company.

The company is a cash cow. It prints billions every year and delivers some of the biggest dividends on the index. Income hasn’t even started declining and some projections have the number of cigarette smokers to continue rising for years.

The demise of smoking has been predicted since at least the 1980s. Interestingly, this seems to have caused unloved tobacco stocks like Imperial and its fellow FTSE 100 member British American Tobacco to offer huge market-beating returns even up to the present day.

Fourth choice

The fourth and final suggestion was £74bn market cap pharma giant GSK (LSE: GSK). The company, formerly known as GlaxoSmithKline, is another where my AI chum might be stretching the definition of ‘hidden’ a touch. But it might have some real potential.

Pharmaceutical companies live and breathe on their pipeline. A new drug can completely change a company’s fortunes. Novo Nordisk shareholders can attest to that after the development of appetite-suppressing drugs like Ozempic or Wegovy. So GSK’s pipeline of dozens of treatments and vaccines sounds promising.

Another fact worth mentioning is valuation. GSK trades at around nine times forward earnings. This is lagging significantly behind its peers. Compare to fellow FTSE 100 AstraZeneca with a forward P/E ratio of 17. This suggests the shares might be at a low ebb.

Looking at downsides, this is perhaps a company in stagnation – a share changed hands for more money back in the 90s! – but might be worth considering nonetheless.

The post ChatGPT just gave me 4 FTSE 100 ‘hidden gems’ appeared first on The Motley Fool UK.

The good news is that the FTSE 100 is filled with mature, dividend-paying companies with impressive track records. And among these stands Imperial Brands (LSE:IMB).

While not everyone’s keen on the idea of owning shares in a tobacco business, this lack of interest has resulted in a historically above-average yield that still stands at an impressive 5.2%. And for around £4,500, investors can snap up 150 shares and unlock a roughly £240 passive income overnight right now.

But is this actually a good investment?

Impressive payouts

Even with all the regulatory and tax pressures placed on the tobacco industry over the last 20 years, Imperial Brands’ revenue and cash flows have proven to be remarkably resilient. And, consequently, the company boasts a long track record of hiking shareholder payouts (ignoring the dividend cut issued during the pandemic).

However, with global awareness of the health impacts from combustible tobacco products on the rise, the company’s seen a slow but secular decline in cigarette volumes. And the same’s happened to its leading rivals as well.

So far, the strategy of the entire sector has seemingly been to offset volume declines through price hikes. Given the addictive nature of its products, this pricing power has been relatively easy to exercise, even with stiff competition. But this strategy has its limits as more and more smokers are simply priced out of the market.

That’s where Imperial Brands’ Next Generation Products (NGPs) platform enters the picture.

By building out its portfolio of healthier cigarette alternatives like vapes, heated tobacco, and oral nicotine, management’s seeking to further offset the steady decay of its core cigarette business. And while it’s still a small part of the business today, this segment’s expanding rapidly, contributing £368m of revenue in its 2025 fiscal year (ending in September).

Risk versus reward

With the performance of its NGPs improving in recent years, the Imperial Brands share price has been on an impressive upward trajectory since early 2024, climbing over 55% over the last two years. However, there’s no denying that this part of the business remains unproven.

NGPs are still loss-making. And while management’s projecting a breakeven point to emerge between 2027 and 2028, there’s still a lot of catch-up required before it can replace legacy tobacco profits. In the meantime, the group’s net debt’s on the rise.

While the firm’s borrowings are still at manageable levels, higher gearing ultimately puts more long-term pressure on cash flows and, in turn, dividends. As such, dividend growth could actually slow rather than accelerate in the coming years, even if NGP performance remains on track.

So where does that leave income investors?

The bottom line

For those seeking stable dividends and are less concerned about payout growth, Imperial Brands does seemingly offer an attractive yield, albeit with a few crucial risks that must be considered carefully. But for income investors looking to own stocks that can meaningfully expand their dividends each and every year, I think there are far better opportunities to explore elsewhere.

The post Buying 150 of these dividend shares unlocks a triple-digit passive income overnight! appeared first on The Motley Fool UK.

Even starting with no savings at all, it’s possible to plan sensibly for the long term. At The Motley Fool, we believe the best way to do this is by investing in the wealth-building machine that is the stock market. And there’s no better place to draw inspiration than Buffett, who has spent decades explaining exactly how he does it.

Understand long-term compounding

Many new investors assume the stock market is a get-rich-quick scheme. In reality, it’s the opposite. Building wealth through equities takes years. It means owning a spread of shares that offer not just the potential for capital growth, but something beginners often overlook: dividend income.

The FTSE 100 is particularly strong here, hosting some of the most generous dividend payers in the world. By reinvesting those payouts, investors buy more shares, which then generate more dividends, creating a powerful compounding effect over time. Any share price growth comes on top of that.

FTSE 100-listed tobacco group Imperial Brands (LSE: IMB) has a brilliant track record of rewarding investors. Its shares are up around 15% over the past year and 85% over five years. On top of this, they offer that magic ingredient, income.

Today, the stock has a trailing yield about 5.3%, comfortably ahead of most cash savings rates. Imperial Brands has increased its dividend every year this century, with the sole exception of the pandemic-hit 2020. That gives investors not just income, but income that rises over time, helping to offset inflation. 

Imperial Brands for income

In 2026, the yield’s forecast to climb to 5.58% as a result, then climb again to 5.86% in 2027. That means it’s rising in real terms.

Shares are more volatile than cash in the short term. Capital values will rise and fall, but that volatility is the price investors pay for the superior long-term returns from equities.

Imperial Brands faces challenges, like every company. Smoking rates are falling in the West and health and regulatory threats aren’t going away. However, I think it’s well worth considering today with a long-term view. Many investors will want to steer clear of Big Tobacco altogether. No problem. Plenty of other FTSE 100 stocks offer similar compounding potential and in some cases even more.

But Buffett stresses the key to investing is time: “My life has been a product of compound interest. Nothing more. Nothing less. And nothing brilliant.”

That’s hugely encouraging. Investors don’t need to match his genius. They need time. It’s why Buffett urges people to start early. As he puts it: “I started building this little snowball at the top of a very long hill.”

Some people think it’s too late to invest. It isn’t. Few of us know how long that hill is going to be. That’s why the best time to start investing is today.

The post With zero savings, how you could follow Warren Buffett and start building wealth today appeared first on The Motley Fool UK.

Although not ethically to everyone’s taste, it sits in a familiar ‘Big Tobacco’ niche. This features modest but steady growth, strong cash generation, and robust dividends that are forecast to rise.

Management’s disciplined buybacks add another layer of shareholder value, helping lift the share price over the past year. More may be to come, given its low relative valuations.

Given these factors, how much retirement income could my holding in this stock realistically produce?

Strong business fundamentals

Consistent earnings (‘profits’) growth enables robust cash generation, which in turn is crucial for supporting dividend increases.

A risk to Imperial Brands is any misstep in its transition to smokeless nicotine substitutes. This could allow competitors doing the same thing to gain an advantage, thus squeezing its margins.

However, consensus analysts’ forecasts are that earnings will grow by 4% a year to end-2028. This looks well-supported by the firm’s recent sets of results.

Its full-year 2025 numbers released on 18 November showed a 4.6% year-on-year rise in adjusted operating profit to £3.99bn. This was slightly ahead of consensus estimates of £3.98bn.

Free cash flow jumped 12% to £2.7bn from £2.4bn previously, while adjusted earnings per share increased 9.1% to 315p.

Having returned £10bn to shareholders from 2021-2025 through dividends and buybacks, the firm announced another £1.45bn share buyback for 2026. 

The company expects 2026 adjusted operating profit growth in the 3%-5% range.

Analysts’ rising dividend forecasts

Imperial Brands has raised its dividend from 139.08p in 2021 to 160.32p in 2025. 

From the beginning of that five-year period, this resulted in annual average dividend yields of 8.9%, 7.6%, 8.8%, 7.1%, and 5.1%.

Currently, the dividend yield is 5.3%, based on the 160.32p payout and the £30.49 share price.

This compares very favourably with the present FTSE 100 average of 3.1%.

However, analysts forecast Imperial Brands’ dividend yield will increase to 5.6% this year, 5.9% next year, and to 6.2% in 2028.

How much income can it generate?

My £20,000 holding in Imperial Brands could make me £17,119 in dividends after 10 years.

This is based on an average 6.2% dividend yield, although this can also fall over time. It also assumes the dividends are reinvested into the stock to harness the enormous power of ‘dividend compounding’.

On the same basis, the payouts could rise to £107,861 over 30 years. At that point, including the £20,000 original investment, the holding would be worth £127,861.

That would give me £7,927 a year in income from dividends — a great boost to the UK State pension.

My investment view

I think my holding in the firm is currently sufficient, given the overall risk-reward balance of my portfolio.

However, I do think its strong income potential, supported by solid earnings growth and strong free cash flow, should drive rising dividends over time.

Low relative stock valuations may also keep driving share price gains too. Its 1.3 price-to-sales ratio is bottom of its peer group, which averages 4.5. This comprises Japan Tobacco at 3, British American Tobacco at 3.6, Altria at 5, and Philip Morris at 6.5.

Its 11.5 price-to-earnings ratio also looks very cheap compared to its competitors’ average of 22.6.

The post Here’s how my £20,000 holding in this top-flight income share could make me £7,927 a year in retirement… appeared first on The Motley Fool UK.

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!

The post I asked ChatGPT to design the ultimate 5-stock passive income ISA – here’s what I got  appeared first on The Motley Fool UK.