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Is there such a thing as the perfect passive income portfolio? Naturally, that’s something all income investors strive for — but can artificial intelligence (AI) help to make it happen? I decided to put that theory to the test.
Lately, generative AI systems like ChatGPT have been in the news for many reasons — some good, some not so good. One notable occurrence was the unchecked publishing in the Chicago Sun of a summer reading list that contained made-up books. The event highlighted the inherent limitations of AI and the critical need to fact-check its responses.
Fortunately, when I asked it to suggest the best stocks for a passive income portfolio, it didn’t just make up companies. But did it make good selections?
Yes and no.
A mixed bag
I began by stating that I’m a British investor aiming for a steady income stream when I retire in 20 years. It responded with an initial statement about the importance of sustainable dividends, strong fundamentals and diversification.
So far, so good.
It then provided the following list of stocks for various reasons: Shell, Rio Tinto, Legal & General, Lloyds, Segro, GSK, Unilever, Rolls-Royce, Smiths Group, National Grid and Vodafone.
With the exception of Rolls-Royce, the majority of these are either strong dividend payers or defensive stocks. Personally, I’m against Shell and Rio Tinto for environmental reasons, and I question the inclusion of Segro and Smiths Group.
But I was most surprised by the exclusion of one of my favourite FTSE 100 dividend shares: Aviva (LSE: AV.)
The best of both worlds
What I like most about Aviva is that it delivers both growth and dividends — a rare combination. Since May 2020, its price has grown 160%, representing annualised growth of 21% a year! And that’s on top of the average 6% yield it’s held throughout that time, equating to total returns of around 26% a year.
Plus, dividends have been increasing at a rate of 18.16% a year for the past five years. But as we know, past performance is no indication of future results.
So can the company keep up this winning streak?
Strong fundamentals… but risk remains
I see no immediate reason Aviva can’t keep performing well, but its price is now almost 30 times earnings. That limits the potential for further growth as the high price might deter new investment. It also faces certain risks, including weakened profitability from falling interest rates and high inflation that could increase claims.
But so far, things are looking good.
In 2024, operating profit increased 20% to £1.77bn and cash remittances climbed to £1.99bn, representing a 5% year-on-year growth. General insurance premiums rose 14% and sales of insurance, wealth and retirement products grew 22%.
Helping to drive home its aggressive expansion goals, it recently acquired rival insurer Direct Line — a move that will enhance its position in the UK motor and home insurance market.
Overall, Aviva looks to me like a company going from strength to strength. Yes, it still faces risks and it may struggle to continue its recent growth trajectory in the short-term. But as a long-term addition to a passive income portfolio, I think it’s a promising stock that’s well worth considering.
