I asked ChatGPT to design a 5% yielding passive income ISA from 5 FTSE 250 shares and it said…

I’m looking to build a portfolio of shares to generate a passive income in retirement, and I’ve mostly chosen FTSE 100 stocks so far. I’d like to give the FTSE 250 a shot and decided to start by asking ChatGPT to lay the groundwork.

The chatbot isn’t designed to be a stock picker or a portfolio planner, but it’s fun to use and I asked it for five names with a target yield of 5%.

Trusts and property picks

Its first suggestion was City of London Investment Trust. This didn’t surprise me. ChatGPT doesn’t think for itself, it basically synthesises whatever it finds on the web, and this trust is hugely popular among income seekers.

One of the risks is that it can presents out-of-date info as new, and that’s what it does here, saying the yield is 5% when it’s just 4.1%. So I’m already undershooting my income target.

Next up it picked Tritax Big Box, a real estate investment trust (REIT) that owns large logistics warehouses. It praised its long leases and strong tenants, which should deliver “visibility of returns”.

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ChatGPT says it yields slightly below 5%, when it’s 5.15%, then adds: “The risk is sensitivity to interest rates, because property valuations can come under pressure when borrowing costs rise.” Most analysts now expect interest rates to fall rather than rise, but there you go.

Dividends and growth potential

ChatGPT also included Warehouse REIT, praising its solid distribution record and exposure to smaller industrial units. I see two problems here. First, having two REITs in a five-stock portfolio is a bit much. Second, Warehouse REIT was acquired by Blackstone in a £489m all-cash deal in September. So I couldn’t buy it if I wanted to.

My robot ‘bro moved onto the financial services sector with its next pick, Paragon Banking Group, which yields 4.95%. No arguments there. The shares have sold off lately but look good value with a price-to-earnings ratio of just eight.

Big Yellow Group

The final pick was Big Yellow Group (LSE: BYG), which ChatGPT called “a steady income generator with room to grow”. It’s a self-storage operator with sites in busy areas, and demand has stayed strong as people downsize, relocate or run small businesses needing space. The trailing yield sits a touch below 4%, ChatGPT says. It’s 4.25%, but let’s not quibble.

The P/E ratio is 18.9 though, and my robot buddy rightly noted that “the shares don’t look bargain-bin cheap”. But it says self-storage has held up through different market cycles, “helped by the stickiness of customers and the limited supply of suitable sites”. 

But then ChatGPT lets itself down, by saying the Big Yellow Group share price is down slightly over one year and up 25% over five years. In fact, it’s down 6.6% and 5.8% over those timeframes. I don’t think that yield makes up for such a disappointing run, and I’m surprised the P/E is so high.

I think City of London, Tritax and Paragon are all worth considering, but can’t buy Warehouse REIT and wouldn’t buy Big Yellow Group. If I built my retirement around these five (sorry, four) stocks, I could be in for a bumpy time. As ever, investing demands the human touch, rather than a clunky robotic one.

The post I asked ChatGPT to design a 5% yielding passive income ISA from 5 FTSE 250 shares and it said… appeared first on The Motley Fool UK.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Tritax Big Box REIT Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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