At £12.95, the BAE Systems (LSE:BA.) share price has soared by almost 120% since Russia invaded Ukraine three years ago. It’s charging higher again after a disappointing end to 2024, driven by renewed fears over the geopolitical landscape.

A strong set of full-year financials on Thursday (19 February) have helped fuel this fresh move higher.

If broker forecasts are correct, BAE’s shares will continue to surge over the next 12 months. But how realistic are current projections, and should investors consider buying the FTSE 100 share for their portfolios?

Double-digit gains predicted

There is a broad range of analyst predictions for BAE Systems’ shares over the coming year. One particularly bearish forecaster believes the company could fall as much as 5% between now and February 2026, to £25.25 per share.

At the opposite end of the scale, the most bullish broker thinks BAE will rise as high as £16.85 per share. That’s up a hefty 30% from current levels.

However, the average price target among 17 brokers with ratings on the stock is £14.77 per share. That marks a 14% premium to today’s price.

Good value

That suggests further healthy upside from current levels. When combined with potential dividends, investors could reap more FTSE 100-beating returns with BAE Systems over the next 12 months.

That said, it’s important to note that BAE’s valuation is higher today than at any point in the past decade. This could in theory limit the chance of additional price gains.

At 17.7 times, the current forward price-to-earnings (P/E) ratio sits above the 10-year average of roughly 15 times.

Yet investors should also remember that BAE Systems shares still trade at a hefty discount to many of its overseas peers.

France’s Safran and Germany’s Rheinmetall, for instance, trade on prospective P/E ratios of 33.4 times and 32 times respectively. Italy’s Leonardo trades on a multiple of 21.8 times. And in the States, RTX carries a P/E of 20.5 times.

Stunning progress

Given its sector discount and the favourable trading landscape, I believe BAE Systems’ share price could continue rising as City brokers predict.

Last week’s strong trading update again underlined the company’s excellent momentum. Revenue leapt 14% in 2024, to £28.3bn, while its order backlog rose by £4bn to record highs of £77.8bn.

Pre-tax profit rose 6% from 2023 levels, to £2.6bn.

BAE’s top-tier supplier status and diverse range of capabilities position it well to meet growing demand. Following on from last year’s strong performance, it’s predicted annual sales growth of 7% to 9% in 2025, too.

Rapid rearmament in the West has supercharged defence sector sales since early 2022. And following US threats to reduce its military protection, growth could accelerate as European nations spend to compensate for Uncle Sam’s reduced role.

Supply chain problems and project disruptions could impact BAE’s ability to grow earnings. But the company’s strong record of execution helps soothe any fears I have. I think it remains a top growth stock to consider.

Building a second income stream through investing is an attractive goal. With the right mix of investments, it’s possible to generate reliable passive income while balancing risk and long-term growth. So, I turned to ChatGPT for an answer: what does the “perfect” second income portfolio look like? Here’s what it came up with.

Dividend stocks: 40%

According to ChatGPT, dividend stocks form the foundation of a strong second income portfolio. The focus should be on companies with a track record of sustainable payouts and resilient cash flows. I agree entirely.

For UK exposure, Unilever, Legal & General, National Grid, and Diageo stand out. These businesses offer defensive qualities, with some benefiting from regulated revenues or strong global brands, the artificial intelligence (AI) platform stated.

On the US side, classic dividend aristocrats like Johnson & Johnson, Procter & Gamble, and Coca-Cola provide international diversification. Meanwhile, Realty Income is a REIT known for its monthly dividend payments.

It also noted that having some additional REITs, such as Segro and Tritax Big Box, brings further stability and income potential.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

Bonds & bond ETFs: 25%

A second income strategy benefits from fixed income to smooth returns and provide a buffer during market downturns such as iShares Core UK Gilts ETF.

Others: 35%

Starting with property, ChatGPT suggested invested 15% in a hands-off approach to commercial property REITs like British Land. I wasn’t sure how that’s entirely different from its initial REITs suggestion.

It then told me to invest 10% in P2P lending and private credit, which can offer attractive yields, although they come with higher risks. Finally, there was alternatives — 10% — such as infrastructure and renewables, with suggestions including Greencoat UK Wind (LSE:UKW).

Expected returns

According to ChatGPT, this portfolio aims to generate a 4%-6% annual income yield, with potential capital appreciation over time. While no investment is risk-free, this mix balances stability, income, and long-term growth, it said.

My take

There are certainly some strong suggestions above, and diversification is always an excellent idea. I’d question whether now is the right time to invest is some of those stocks, but I thought it would be good to circle in one company, Greencoat UK Wind.

Greencoat is a stock I used to own and it’s down massively since I last looked. The FTSE 250 firm invests in operating UK wind farms, delivering inflation-linked dividends (10.35p target for 2025) and capital preservation through reinvestment. As the UK’s first listed renewable infrastructure fund, it offers pure-play wind exposure. Managed by Schroders Greencoat LLP, it meets ESG standards and aligns with SFDR/SDR sustainability frameworks.

However, there are risks. It’s entirely exposed to the natural environment. In fact, management recently revised its long-term power generation forecasts downward after assessing UK wind speed trends.

Wind conditions are crucial for turbine efficiency, and following consultation with an expert third party—alongside recent below-average wind speeds — the company now expects a 2.4% lower long-term generation forecast, reducing net asset value (NAV) by 6.5p per share.

That’s a big downturn. However, it’s interesting to see that the stock is currently trading at a 26% discount to its NAV. As such, I’m going to add this one to my watchlist.

UK shares are enjoying a purple patch right now. After rising strongly in 2024, the FTSE 100 is up 5.4% since the start of the year, beating the S&P 500 in the year to date.

It’s not just blue-chip UK stocks that are currently tearing higher. Shares of all types and sizes are gaining value as market confidence in the British economy improves, bolstering demand for domestic assets.

Yet the London stock market’s still a great place to pick up bargains. Here are three whose low price-to-earnings (P/E) ratios and enormous dividend yields make them, in my opinion, worth a very close look.

The copper miner

A sinking red metal price has pulled Central Asia Metals (LSE:CAML) shares sharply lower since last spring. The danger isn’t over, either, as China’s economy splutters and the threat of new trade tariffs grows.

Yet I think copper stocks like this could rebound strongly over the long term. Demand for the versatile metal — as well as lead and zinc, which Central Asia Metals also produces — is still tipped to rocket in the coming decades, reflecting its important role in fast-growing industries like renewable energy, consumer electronics, and artificial intelligence (AI).

Central Asia’s near-29% stake in Scottish explorer Aberdeen Minerals also gives it exposure to the nickel and cobalt markets. Its investment last year provides added scope for to capitalise on the energy transition.

Today Central Asia Metals trades on a forward P/E ratio of 7.3 times with a 10% dividend yield.

The greetings giant

Times are tough for the UK retail sector. Rising inflation and weak consumer appetite is hampering revenues, while labour and energy costs are creeping higher.

But I believe Card Factory (LSE:CARD), whose forward P/E ratio is 6.2 times and dividend yield is 6.1%, is an attractive dip buy to consider.

The firm’s focus on the low-cost end of the greetings card market helps revenues remain stable in good times and bad. Like-for-like sales rose 3.7% during the 11 months to December. The company is also making strong progress in cutting costs to support earnings.

With Card Factory’s store rollout programme continuing, and the business entering the US market last year, I think long-term earnings could grow strongly.

The care provider

Rising UK inflation could also cause turbulence at Care REIT (LSE:CRT). As a real estate investment trust (REIT), its earnings are highly sensitive to movements in interest rates.

Yet I believe the uncertain rate outlook is more than baked into the trust’s low forward P/E ratio of 5.5 times.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

With the business also sporting an 8.8% dividend yield, it’s a bargain share I myself am considering buying. That large yield partly reflects REIT rules, which stipulate 90% or more of annual rental profits be distributed to shareholders.

As a major care home provider, Care REIT has considerable long-term growth potential as Britain’s elderly population steadily rises. Average weekly fees here leapt 6.5% over the course of 2024, and could continue to increase strongly as demand ramps up.

I did not buy shares in Tesla (NASDAQ: TSLA) a month ago. So far, that looks like the right decision as Tesla stock has tumbled 16% over that period.

Still, as a long-term investor, I do not typically think about owning shares for a matter of weeks.

I reckon the real money is made over the long term. Indeed, as Warren Buffett’s former partner Charlie Munger once said, “the big money is not in the buying and the selling but in the waiting”.

Tesla stock actually demonstrates that point, over the long run.

Even after the past month’s fall, it is still up 490% over the past five years.

So, I have been considering whether the recent share price tumble could be a buying opportunity for me.

I do like many things about the company – but am concerned that, at its current price, it could still be a falling knife.

Tesla has a lot of unique strengths

This, for me, is a question of price.

I think there is a lot of substantial value in Tesla. The thing is, if I buy it at too high a price, and the price later falls, I could end up losing rather than making money with my investment.

Focusing on the underlying business, why do I like the Tesla investment case?

Electric vehicle adoption continues to grow and I expect that will remain the long-term trend. Tesla has a proven production and sales capability at scale. It has a strong brand, distinctive models like the Cybertruck, and lots of proprietary technology.

That could help the existing car business grow in coming years. It also positions Tesla well as it seeks to expand into new vehicle-related opportunities such as self-driving taxis.

On top of that, vehicles are not the only driver for Tesla’s success.

It has a large power generation business that has been going gangbusters. I reckon the future growth opportunity there remains huge.

I’m concerned this could be a falling knife

Indeed, Tesla made net income of $7bn last year.

That is a lot of money. Still, it is less than half of the prior year’s net income. As Tesla’s car volumes declined for the first time, company revenue grew just 1%.

For a growth share, revenue increasing 1% year on year does not impress me. While the $7bn net income is a lot of money, it pales next to Tesla’s capitalisation on the stock market: $1.1trn.

That means the Tesla stock price-to-earnings ratio is 174.

For any company, that would strike me as very high. But this is a company that saw little revenue growth last year and sharply lower profits.

Competitive threats from other carmakers have grown, and increased pricing pressure could mean Tesla needs to cut prices further (hurting profits) or settle for lower sales volumes (hurting revenues).

I think the business is excellent, but the valuation simply looks unjustifiable to me. I think it could end up falling a lot more from here.

If it goes down enough, it might even reach a point where I am happy to buy – but that is still a long way down.

So, for now at least, I will not be buying any Tesla stock.

Putting some savings to work can be a simple way of setting up passive income streams. For example, by investing £9k in a range of dividend shares, I think someone could realistically target £108 each month on average in passive income.

Here’s how.

Setting up a passive income machine, thanks to dividend shares

In my example, I make three key assumptions. One is a compound annual growth rate of 6%. That seems plausible to me in today’s market, even while investing in blue-chip shares.

The second assumption is that the dividends are initially reinvested (compounded) and, after a period of time, the portfolio is reinvested (if necessary) in dividend shares yielding an average 6%.

It might have been like that all along, but it could also have been that some of the growth came from share price increase. When it comes time to draw down the passive income, the whole portfolio should be yielding 6%, not just compounding in value at that level.

The third assumption is that the investor stops compounding and starts receiving the passive income after 15 years. This is a serious income building plan, not some get-rich-quick quackery.

The same approach could be applied much sooner, but the 15-year timeframe should enable a bigger passive income than, say, waiting only two or three years.

A 6% dividend yield’s possible, while laser-focused on quality

At the moment, the blue-chip FTSE 100 index of leading shares yields 3.4%. So the 6% target I use here is quite aggressive. But I think it is achievable even sticking to members of the FTSE 100.

For example, I own shares in Legal & General (LSE: LGEN). At the moment, it yields 8.6%. Even better, the financial services firm has set out plans to keep growing its dividend per share annually, as it has done over the past several years.

Now, this month it has also set out plans to sell its US protection business. While that could boost shareholder returns in the short-term, it will also likely mean lower long-term cash generation for the smaller firm. That is a risk to the long-term dividend outlook.

But I think there is a lot to like about Legal & General and have no plans to sell my shares. Its target market is large and thanks to its powerful brand and large customer base it has a strong competitive position.

As the recent news demonstrated, management is focused on shareholder returns. From a passive income perspective, I think that is good news for me and lots of other small, private shareholders who get dividends from the company without needing to work for them.

Turning savings into an income machine

Of course, while that is all well in theory, to join in dividends from Legal & General or any other company, a would-be investor needs to turn into an actual investor.

To get the ball rolling, they could put the £9k into a share-dealing account or Stocks and Shares ISA, so they are ready to invest.

Super-investor Warren Buffett is now a billionaire many times over. But his stock market beginnings were very humble. Schoolboy Buffett saved money from a paper round so he could start buying shares.

So while £800 might not sound much for an investor to get into the stock market for the first time, I think it is ample. It is enough to diversify and also means dealing fees and costs could be proportionately lower than if investing a smaller amount — as long as the investor pays attention to how to minimise such fees, as I explain below.

They could even apply some of Buffett’s accumulated wisdom as they do so.

Weighing both sides of an investment case

For example, one common mistake when people start buying shares is focusing on how much money they could make if one performs brilliantly. That is understandable. People invest to try and build wealth.

But it is important, from day one, to pay as much attention to the risks of a potential investment as to how it could perform if things go well.

Spreading the money – and risk

That also helps explain why billionaire investors like Buffett do not put all their eggs in one basket. They diversify across different shares.

With £800, an investor could easily do the same.

Think of buying a bit of a business

Another common mistake when people start buying shares is looking at the share price alone. Has it slumped? Does it look like it is starting to turn? Is it far lower than a previous high?

Share price definitely matters. But not in isolation. It matters in context. What is an investor paying relative to what they get back in return?

To understand that requires an understanding of the business itself and whether it is attractive. Buffett thinks not in terms of buying a piece of paper with a company name on it, but rather a stake in a business. So he assesses the attractiveness of the business itself.

What makes for a great business?

As an example, consider Buffett’s biggest shareholding: Apple (NASDAQ: AAPL). I think this has the hallmarks of a great business. The market of potential and actual customers is huge and likely to remain that way.

Thanks to its unique brand and technology, Apple has pricing power. That enables it to make juicy profit margins. Its user ecosystem means that it takes a lot for customers to abandon Apple and start their digital lives afresh on another type of phone.

That said, there are risks. For example, Apple’s phones are pricy. In a weak economy, I think increasingly sophisticated but cheaper phones from Chinese brands could steal market share from Apple.

On balance though, Apple is a company in which I would happily invest (and have in the past). But I have no plans to start buying shares in the tech giant.

Why? Share price, pure and simple.

Even a great business can be a rotten investment if one overpays for it.

Investing cost effectively

Billionaires like Buffett got rich partly by keeping a close eye on costs. They can eat into investment returns.

So, an investor even with just £800 ought not to start buying shares before finding a share-dealing account or Stocks and Shares ISA that suits their individual needs.

A dividend stock with a big yield can be a great way build up long-term income. But we don’t usually want to see a share price slump at the same time. And that’s exactly what’s happened to Land Securities Group (LSE: LAND). Just look at this share price chart, especially over 10 years…

Dividend yield boost

Land Securities is a commercial real estate investment trust (REIT). I find myself increasingly drawn to them at the moment. We’ve had share price weakness across the board, as the property market has been under pressure. That depresses asset values, makes borrowing harder, and raises the general risk of failure. No wonder the market has turned away from the sector.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

But a fallen share price can give a nice boost to the dividend yield, and we’re looking at a forecast 6.9% here. Well, we will be if the dividend is maintained. And that can be another risk for an investment firm facing high borrowing costs.

Cheap borrowings

With first-half results posted in November 2024, we heard that the average cost of debt had risen. In times of high interest, that’s not surprising. And it can definitely be a bit of a worry. But wait, it’s still only 3.5%, up from 3.3% a year previously.

That was at 30 September. And the update said “we expect this to remain stable during the second half“. If we still see a debt cost of 3.5% at full-year time, when the Bank of England’s base rate is likely to still be at 4.5% (or not much less at best), I’ll see that as a big win.

Gross borrowings added up to £3,624m with £2,954m in medium-term notes. And that total is really not far off the trust’s £4.3bn market capitalisation. I suspect it could weigh fairly heavily on the share price for a while yet.

But there was still £2.2bn of cash and undrawn facilities available at the end of September. And the company reckons it could stand a 40% fall in portfolio valuation before its covenants could start to bite. I rate the liquidity as maybe under a bit of pressure, but nowhere near critical.

Retail risk

The trust is big in shopping centers and retail parks. And the rise of online retailing could keep property values low and turn investors away. But it can work both ways. Investors with the money to spend can often buy properties at bargain rates.

In December, Land Securities snapped up 92% of the Liverpool ONE shopping centre for £490m. Of that, £35m is deferred for two years, and the company reckons it should see a 7.5% return on its initial outlay. I think it got a cracking deal.

The shopping centre has a mix of retail, restaurants, bars, and high-profile leasure brands. It’s also home to the Everton Two official retail store (Everton Two, Liverpool One, geddit?). And it’s very busy.

I might be contrarian. But I rate the chances of the death of bricks-and-mortar retail as greatly exaggerated. And I think this share has to be worth considering for REIT investors with long-term income plans.

There are few things in this world more enjoyable than earning cash without lifting a finger. That’s the beauty of investing in dividend shares. The regular payments sent to shareholders feel like free money sent from above.

That’s why I’m on a life-long mission to build a steady passive income stream from dividends. 

First, I must build up my portfolio’s value through the miracle of compounding returns. Initially, I can accelerate this process by reinvesting my dividends. I can further optimise my growth with a Stocks and Shares ISA, allowing me to invest up to £20,000 per year with no tax on the capital gains.

Once the pot is large enough, I can start withdrawing my dividends as income and enjoy a comfortable retirement.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

What’s the catch?

Does the above sound too good to be true? I’ll admit, it isn’t easy — but it is possible! For it to work, three things are required: patience, dedication and a market-beating portfolio of the best dividend stocks in the UK.

Choosing the right dividend stocks isn’t always easy. There are several factors to consider, like the yield, payout ratio, and dividend growth history. It’s equally important to assess the financial stability of a company by checking its debt and cash flow.

The ideal dividend stock has strong cash flow, a sustainable payout ratio, and a history of increasing dividends. A high yield is great, but only if the company can afford to maintain it.

How to build wealth with dividends

An investment of £10,000, in a portfolio yielding 7%, would generate £700 in annual dividends. Reinvesting these payouts means the portfolio would grow modestly and could double in just over 10 years.

With the contribution of a further £3,000 per year to that portfolio, it could soar beyond £70k in 10 years. In 20 years, it could be over £200k, paying dividends of £7,500 per year.

That’s the power of compounding — turning today’s dividends into tomorrow’s wealth.

Stock picking

Achieving a portfolio yielding 7% requires very careful stock picking. Long-term dividend investors tend to avoid popular, trending stocks and opt for safe, boring companies.

Gas and electricity supplier National Grid (LSE: NG.) could fit the bill. It’s often cited as one of the best UK dividend stocks and is frequently found in passive income portfolios. The shares enjoy moderately stable growth, up 108% in the past decade. But more importantly, it pays a reliable dividend with a 5.8% yield.

Recently, it’s faced the risk of losses in its efforts to meet energy transition goals. This has been compounded by higher labour expenses as a result of the new UK Budget. If expenses get too high, it may have to cut its dividend to save capital for daily operations.

As a highly-established and critical utility provider, it’s likely to remain in high demand for decades to come. It also exhibits defensive qualities, typically performing well even through economic downturns.

There are many similar UK stocks with high yields and steady dividend growth on the FTSE 100. Some examples include Legal & General, British American Tobacco, and Tritax Big Box REIT.

By reinvesting dividends now and staying patient, I’m building towards a future where my investments pay me instead of the other way around. The road to financial freedom starts with smart choices today.

A Stocks and Shares ISA can be a fabulously rewarding thing. But for many investors it may not turn out that way. Partly that reflects the approach someone takes to their ISA.

Here is how I go about trying to build the perfect Stocks and Shares ISA.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Step 1: deciding how much to invest

There is an annual allowance for how much someone can invest in their ISA. I would be happy to take full advantage and invest £20k annually if I could. But investors need to be realistic about their own situation and financial circumstances.

So I try to invest what I can while juggling all of life’s other financial needs. And that amount is not necessarily the same from one year to the next.

Step 2: picking the right ISA

With so many Stocks and Shares ISAs available, I want to make sure I am using one that suits my own needs and objectives.

Even what seem like small fees and charges can add up over the course of time and eat into my investment returns.

Step 3: setting investment goals and choosing an approach

What works for one investor may not suit another. We each have our own goals, risk tolerance, timeframe and approach. For example, some investors like to stick to dividend shares, but in my ISA I have a mixture of growth and income shares.

I think a key part of trying to invest successfully is sticking to what I know (what Warren Buffett calls an investor’s “circle of competence”).

Step 4: building a portfolio

Part of my risk management approach is to make sure my ISA is always invested across multiple shares not just a single great hope, no matter how promising it may seem.

I aim to hold shares for the long term, so I am willing to spend a lot of time researching before I buy (and sometimes holding on even for years until I can buy at what I think is an attractive price).

As an example, consider Cranswick (LSE: CWK).

While you may not be familiar with the name, you likely are familiar with the food producer’s products and may well have eaten its sandwiches or other items many times without knowing who made them.

I like the business. The market is large and resilient. Cranswick has built economies of scale and long-term supplier relationships. It has a network of factories that enable it to serve large grocers nationwide and has proven its business model.

Last month, it reaffirmed its guidance for full-year performance. It grew its annual dividend last year by 13%, making for 34 years of continuous dividend growth. Yum!

One risk I see is weak consumer demand, which could pose a threat to sales volumes.

Still, at the right price, I will happily buy Cranswick shares. But for now the company is on my watchlist but not in my Stocks and Shares ISA, as the price is too high for my tastes.