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The rise of ChatGPT, OpenAI’s tool that can help answer questions, has been unprecedented over the past year. Even investors can use it to tap into the extensive knowledge bank when it comes to picking dividend shares. I decided to ask the bot for its two favourite income ideas and to explain the reasoning behind them. Here’s what it generated for me.
A solid start
The first pick was Legal & General (LSE:LGEN). Interestingly, this is also my top pick at the moment as well from my own research. I’m thinking about investing in the near future. So at least I’m partially aligned with AI!
The reasoning was based partly on the strong track record of paying (and steadily growing) dividends. It targets a payout ratio of around 50-60% of operating profits, which is sustainable. After all, no one wants to buy a stock only for it to cut the dividend the following year due to being stretched with cash flow.
Another factor is the business model and who Legal & General targets. The company earns across multiple channels, including life insurance, pensions, and asset management. Therefore, it’s diversified and so even if one area of the business slows, other areas can help prop up overall finances.
As populations age, demand for retirement solutions is growing, particularly in the UK and US. However, one risk is the tight regulation on the company. Naturally, firms responsible for investments should be regulated. But Legal & General is slightly at the mercy of any changes going forward.
Concerns about the next pick
The second idea it suggested was British American Tobacco (LSE:BATS). I disagree with this pick, but understand why the ‘objective’ bot would have picked it.
Over the last year, the stock’s up 37%. This contrasts to the 2% fall in Legal & General shares over the same period. ChatGPT said it likes the company due to it being a cash flow machine. Despite declining smoking rates, BAT generates robust free cash flow (over £9bn annually) comfortably covering the dividend. And the continued commitment from the management team to support dividend growth is another plus.
Yet from my perspective, the fall in demand for traditional tobacco products is a big concern. Even though New Category products are trying to make up the shortfall, I’m not convinced this is the growth sector where I want to be allocating my money.
I’m not saying I see the dividend in any immediate threat, but I just feel that I want to put my money to work in other sectors that offer a less cloudy outlook.
I do think ChatGPT made some good points, especially regarding the profit and cash flow details of both companies. However, there will always be a need for human stock picking to rationalise the information and make the final decisions!
