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I asked ChatGPT to pick a dividend share that might suit a cautious investor aged 60 looking for income without taking too much risk. As retirement approaches, most investors won’t want to gamble with their capital.
I was curious to see what artificial intelligence (AI) might produce, but I wasn’t at all surprised by the answer. ChatGPT doesn’t have a brain of its own, it simply summarises what’s on the web. So its choice was always going to be one of the big FTSE 100 income stocks that investors generally rate.
And so it proved, as it plumped for cigarette maker British American Tobacco (LSE: BATS). The company has an impressive record of paying dividends, increasing payouts every year this millennium. Its current yield is 5.88%, and there’s a reasonable chance it will rise over time (though of course, no guarantees).
British American Tobacco shares have flown
ChatGPT argued that the stock offers the right blend of yield, maturity and predictability: “It generates huge amounts of cash from established cigarette brands and newer vaping products, funding its dividend through a steady, if slowly shrinking, base of smokers”.
I’d add that lately, British American Tobacco’s delivered plentiful capital growth on top, with the share price up 48% in the last year. However, at some point that pace is highly likely to slow. This isn’t a small, nimble growth stock, it’s an £87bn blue-chip. Sheer size limits how quickly it can expand.
It still looks good value, with a price-to-earnings ratio of just 11, well below the FTSE 100 average of around 18. That reflects the assumption of slower growth ahead and the long-term challenges cigarette makers face. BAT operates in a competitive market, slugging it out alongside names such as Philip Morris International and Imperial Brands.
Smoking’s heavily regulated, but it isn’t disappearing overnight. The cash should keep flowing for years, though the sector faces potential long-term decline, higher taxes, health concerns and ethical objections. Some investors will want to avoid it on ethical grounds, others may question the sustainability of such a high payout if smoking’s decline accelerates. But with British American Tobacco selling more than 500bn sticks a year, the cash is likely to keep flowing.
Other top FTSE 100 income stocks
When I asked ChatGPT for other contenders, it mentioned Legal & General Group and Unilever. Legal & General’s yield of 8.8% is one of the highest in the market, though share performance has been patchy. Unilever offers a lower yield of about 3.25% via a stable if slightly dull portfolio of global consumer brands.
I hold Legal & General shares. The income’s excellent, but I’ve been disappointed by share performance. I find Unilever a bit underwhelming and sold it recently. Still, both names are worth considering as part of a balanced portfolio. Investors should always make their own choices.
Don’t leave it to a chatbot
ChatGPT’s a tool, not a stock-picking service. Its picks reflect consensus views, not individual needs. A chatbot can be a fun starting point, but not the final word. British American Tobacco is worth considering for those comfortable with big tobacco, but it’s essential to do your own research and prioritise human intelligence over the artificial variety.
