The rise in use of ChatGPT over the past year’s been huge. Even though investors need to be careful about basing any decisions purely on artificial intelligence (AI) sources, I thought it would be interesting to see which passive income stock it would select for me to consider buying now. The result might surprise some.
The stock pick
ChatGPT first informed me of a disclaimer, noting that dividend yields are subject to change. It told me to conduct thorough research or consult with a financial adviser before making investment decisions. So far, so good.
Then it outlined the case for buying British American Tobacco (LSE:BATS). The FTSE 100 stock’s up 25% over the past year, with a yield of 7.95%. As such, it’s one of the highest yielding options in the entire index.
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The generous yield was one of the main reasons why the chatbot suggested it could be a good share for passive income. Further, it noted that the company operates in an area that produces strong cash flow. It’s also considered a defensive stock.
The cash flow should enable dividends to be easily paid. As for the defensive nature of the stock, it could help cushion share price falls during a market crash. The constant demand for the products could help the dividend to be maintained even during difficult times.
The other side of the coin
Somewhat surprisingly, it didn’t really flag up any material risks, simply saying that “regulatory risks in the tobacco sector are a factor to weigh”.
I’m slightly surprised it didn’t expand more on the risks associated with the company. In my view the risks are the main reason why I wouldn’t say British American Tobacco is the best income share to buy now.
The trading update in December noted that full-year performance was being driven by New Categories innovation. This includes vapes and other e-cigarettes. It’s trying to pivot away from traditional tobacco sales, given that globally there’s a push from governments to curb smoking.
Yet this trend of lower tobacco demand has been in tact for several years, hindering revenue growth for the business. For example, 2024 projected revenue’s £26.28bn. In 2019 it was £25.88bn. So the firm hasn’t really grown in the past five years.
Human wisdom
Although some wouldn’t see this as a massive risk, I think it’s a big enough concern to not give it the title of being the best income stock. I’d rather pick a company with a slightly lower yield that’s growing revenue and profitability, in a sector that’s increasing in size. This provides a more sustainable source of income going forward, in my view.
ChatGPT goes on more objective information, so I understand why it picked this stock. But when I add in my subjective view of the sector outlook, it causes me to stop and think. It shows that even with the best AI in the world, the need for humans will remain in the investment process for a while yet!
