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Investing in a Stocks and Shares ISA is a brilliant way to generate a second income to top up the State Pension. There are plenty of dividend-paying shares on the FTSE 100 and FTSE 250 to consider, and I decided to ask artificial intelligence (AI) to highlight a balanced spread of the best ones.
I’d never trust AI to pick stocks. That isn’t what it’s designed to do. But it thought it might throw up a few handy pointers so I gave it a whirl.
Investing for dividends
ChatGPT slung five FTSE 100 stocks at me, and I’ve nothing against any of them individually. But combined, they’d be very risky.
Three of the five offer absolutely stunning yields. Insurer and asset manager Legal & General Group boasts one of the very highest on the FTSE 100 at 8.6%. Wealth manager M&G yields 7.4% and insurance conglomerate Phoenix Group Holdings yields almost 7.9%.
I think they’re worth considering today, but have one worry. All three are in the financial services sector, and have very similar business models and risk profiles. That gives the portfolio massive concentration risk.
I do hold all three, but my portfolio contains almost 20 stocks. To hold them in a portfolio of just five direct equities would be madness.
FTSE 100 underperformer
ChatGPT also recommended cigarette maker British American Tobacco, which has a fantastic track record of dividend income and share price growth. It’s such a portfolio staple I’d be stunned if it wasn’t there.
Its fifth pick was real estate investment trust (REIT) Land Securities Group (LSE: LAND). REITs offer tax-efficient income and this one’s trailing dividend yield of 6.6% is impressive.
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Landsec, as it’s often called, has a solid track record of increasing shareholder payouts. It’s increased them every year this millennium, with just three exceptions. Two were during the financial crisis, which is forgivable, while the third was in the pandemic. Also forgiveable.
Yet the shares have done poorly of late. Landsec owns office blocks and shopping centres, but office demand’s been squeezed by the work-from-home trend, and retail parks are challenged by e-commerce and cost-of-living crisis. The shares are up a modest 4% in the last year, but they’re down 15% over five years, wiping out a big chunk of the income benefits.
Landsec looks nicely valued with a price-to-earnings ratio of 12.3 and should benefit if interest rates fall and the economy recovers. So I think it’s worth considering. But investors must do their own research to explore the risks, not rely on a chatbot.
Balanced portfolio
ChatGPT then recommended another REIT, LondonMetric Property, which yields 6.5%. Frankly I think one REIT’s enough for a small portfolio like this one.
It then tipped an investment fund, Finsbury Growth & Income Trust, calling it a “long- established UK equity trust that offers diversification beyond large-cap stocks”.
Given how heavily this portfolio is concentrated in just a few sectors, it needs all the diversification it can get. I think I’ll rely on my own research in future. I wouldn’t call this an unbeatable passive income portfolio, but I think I could easily beat it through my own stock-picking efforts.
Diversification’s essential, and I can see plenty more FTSE 100 dividend stocks I’d love to buy today.
