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Looking for the best FTSE 100 stocks to buy for steady income, it’s tempting to ask ChatGPT for some help. And that’s exactly what I just did.
The results were… interesting.
The AI chatbot produced a sample portfolio of five stocks. And each individual one? Yes, I like them all. But it also came out with what seems like a bit of a howler.
It listed key things to look for. They include a good yield, cover by earnings, stable cash flow, diversification… remember that last one.
The five stocks
The five it suggested as a sample portfolio for passive income were: Legal & General, M&G (LSE: MNG), Imperial Brands, HSBC Holdings and British American Tobacco.
It told me this selection provides diversification with exposure to different sectors. But, hang on a minute…
It said the sectors are financials, tobacco and banking. Even if those were genuinely different sectors, for just a five-stock portfolio I’d want diversification across five sectors!
And it can’t tell that banks are financial stocks? Did it really suggest I consider piling all my money into just financials and tobacco?
I expect these things could be trained to count banks as financial. But the next misunderstanding is surely just round the corner… simply because there’s no actual understanding at all.
My stock pick
Let’s take a look at one of these, M&G, to see what it might add to a FTSE 100 income portfolio.
M&G is in the savings and investment business itself. And so if the UK stock market does well over the long term, M&G shareholders should too.
But that also means a market downturn is likely to hurt M&G, perhaps worse than the market itself. In fact, M&G had only just been demerged from Prudential in 2019 when Covid hit. And in the 2020 stock market crash, it fell a lot harder than the FTSE 100. Volatility is the main potential risk I see.
And while it’s now back above pre-pandemic levels, the share price has still lagged the index. But it is beating the Footsie nicely on one key measure. Against the index average forecast dividend yield of 3.2%, M&G is on 7.5%.
The dividend should be around 1.2 times covered by forecast earnings. I think that’s good enough, if maybe a bit tight. Forecasts for earnings and dividend growth in the next three years give me some confidence.
AI portfolio
I could look at each of the five in turn. In fact, I know them all quite well, and each one has strong attractions for me. In the right circumstances, I think investors could do well to consider every one of them individually.
But as a five-stock starter portfolio for passive income, this would be an absolute no for me. I reckon the second-riskiest thing we could do when starting out might be putting all our eggs in two baskets.
Human brains and careful analysis are definitely not things of the past.
