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Building a passive income from a portfolio of FTSE 100 and FTSE 250 shares is a brilliant way to prepare for retirement. Doing it inside a Stocks and Shares ISA is even better, as all that income will be tax-free.
I always pick my own stocks, but just for fun, I decided to ask artificial intelligence to do it for me, via ChatGPT. I asked it to list five UK companies to form the backbone of a balanced portfolio, balacing high yields with growth potential.
Dividends and growth
It started with insurer Phoenix Group Holdings. I suspect ChatGPT’s motivations here, as I asked it about Phoenix only recently. That’s one of the problems with using AI to recommend stocks, we don’t always know its parameters.
The chatbot highlighted Phoenix’s bumper 8% dividend yield and strong cash generation. Basically, it was feeding my own views back to me. I think Phoenix is well worth considering, but I wouldn’t buy it on AI’s say-so.
I’m less impressed with the second pick, Legal & General Group. It’s another ultra-high yielding insurer, and I’d rather see more diversification here.
ChatGPT higlights its “punchy yield” of 8.8% but doesn’t mention the shares have underperformed for years. Legal & General also looks incredibly expensive with a P/E of a staggering 86, where 15 is seen as fair value. In a portfolio of five shares, I really wouldn’t want this along with Phoenix.
Humdrum consumer giant
ChatGPT switched sector for its next pick, consumer goods giant Unilever. I’m not convinced, though. I sold the stock six months ago and don’t regret it. The Unilever share price is flat over one year and five, so investors haven’t got much growth, and the yield is just 3.6%. Some may still consider it, but investing is a personal thing, and this is not for me. Another issue with chatbot-based investing.
ChatGPT then highlights oil giant Shell, saying it “adds diversity and inflation protection” while the 4% yield is supported by record cash flows and share buybacks.
It warns that oil prices remain volatile and governments could tighten environmental regulations, but calls Shell “among the most reliable FTSE dividend payers in recent years”. No mention of the fact that it slashed the dividend by 65% in 2020, and it still hasn’t fully recovered.
AI tips Barratt Redrow
Finally, ChatGPT highlighted housebuilder Barratt Redrow (LSE: BDEV). Unfortunately, it got the name wrong, calling it Barratt Developments. This highlights the fact that ChatGPT often uses outdated information – the name changed over a year ago.
ChatGPT also says the dividend yield is close to 7%, when in fact it’s 4.3%. Buying shares demands accurate information. Chatbots can hallucinate.
It goes onto say that Barratt Redrow “benefits from a long-standing reputation and a strong pipeline of new homes”. Is that true now? Or are we talking some time ago?
My view is the house building is a tough sector, and we won’t see any meaningful recovery until the Bank of England cuts interest rates a few more time. Investors might consider Barratt Redrow, but only with a long-term view.
As I said, ChatGPT can be fun, but investors seeking passive income really need to make their own decisions, and use reliable, human-verified information, rather than putting their faith in robots. They’re far from perfect.
