Earning a second income in the stock market is a relatively straightforward process. Investors can just snap up some shares in a dividend-paying enterprise and then just wait for the money to roll in. The challenge is knowing which income stocks are actually worth buying.
Sure, there are metrics like the dividend yield that can be helpful in an initial search. But this measure of payout doesn’t really give much insight into the long-term sustainability of dividends. Not to mention that stock prices also have a habit of moving… and not always going in the right direction.
With that in mind, I decided to explore what artificial intelligence (AI) algorithms had to say about the matter. And when I prompted ChatGPT about the best UK stocks to buy for a second income, it produced an interesting result.
Boring could be best
The FTSE 100 is filled with top-notch dividend-paying stocks, so it’s not entirely surprising that ChatGPT made four recommendations, all of which are from the UK’s flagship index:
- Unilever (LSE:ULVR)
- GSK
- National Grid
- Shell
What’s interesting is that none of these have particularly high dividend yields. In fact, the largest payout comes from National Grid at 4.8%. And that pales in comparison to the payouts of some FTSE 100 stocks like M&G at 9.9%.
However, as previously mentioned, a high yield isn’t great if the dividends can’t keep flowing. And a common theme among all these businesses is that they each have steady cash flows.
Unilever’s vast portfolio of consumer products can be found in almost every supermarket, and GSK’s life-saving drug portfolio is likely not going to fall out of fashion. Meanwhile, the constant rising demand for modern energy infrastructure is going to keep National Grid busy, while oil, gas and renewable energy will likely do the same for Shell.
So it should come as no surprise that each of these businesses has an extensive history of paying dividends every year for decades. And that includes during disruptive periods like the pandemic.
Boring is not risk-free
Let’s take a closer look at Unilever. During 2024, the group delivered respectable results with a 4.2% boost to underlying sales and a 170 basis point expansion of operating margins. Yet the stock actually fell by almost 10% a few days following the report. And zooming out, Unilever shares have actually massively underperformed over the last five years versus the FTSE 100 index.
A big concern is the limits of Unilever’s pricing power. Its branded products are already priced at a premium, and with further hikes, sales volumes may start to suffer as consumers simply switch to cheaper alternatives. This fear was only intensified when management’s outlook for 2025 included the statement: “We anticipate a slower start to 2025 with subdued market growth in the near term”.
Of course, this isn’t the first time Unilever’s branding power has been tested. And so far, the company has managed to land on top, suggesting it’s worthy of a closer look, in my mind.
The other businesses on this list also have their own set of challenges to overcome. And investors need to carefully investigate the threats as well as potential rewards when exploring investment opportunities, even when using tools like ChatGPT.
This post was originally published on Motley Fool
