It has been a simply stunning few years for Nvidia (NASDAQ: NVDA). Nvidia stock has comfortably more than doubled over the past 12 months, moving up 136%.

Over five years, though, the performance looks even more spectacular. In that period, the increase has been 2,150%.

So £20k invested in Nvidia early in 2020 would now be worth £450k. Yes, £450k. Wow!

But I did not buy Nvidia shares five years ago and never like to overpay for shares. So, before even considering whether I think Nvidia stock can move higher from here, can it justify its current valuation?

Massive, proven company in the vanguard of huge change

I think the answer, quite possibly, is yes.

When a small company more than doubles in valuation in one year, that is one thing. But Nvidia has a market capitalisation of $3.5trn.

That means a vast amount of smart money is invested in the share, on a grand scale. Now, that does not mean there might not be a lot of dumb money there too (or merely speculative money). However, it does grab my attention that despite its already huge scale, the company has managed to grow so sharply in valuation recently.

Nvidia has a proven business model and is hugely profitable, with strong profit margins to boot. Its proprietary chip technology gives it a real competitive edge. Best of all,  it is riding a wave of AI spending that could actually grow in years to come.

Does that make its price-to-earnings ratio of 55 cheap?

I do not think so. But it does explain why Nvidia stock may merit that valuation (or even a higher one), if prospective earnings grow at anything like their recent clip. That could happen if AI gathers pace and more businesses invest in it.

Frontier industries can be exciting, but risky

So Nvidia is like a pioneer in a frontier town that is potentially set to explode in size and wealth.

However, as any fan of classic westerns knows, frontier territories can also turn fairly nasty pretty fast.

That can be because others come to stake their claim, a new sheriff (or regulator) rides into town, or the initial burst of heavy spending dries up and is not replaced on anything like the same scale. I see all as risks for Nvidia — if not necessarily today, then at least in the medium term.

When I invest, I like to have what Warren Buffett calls a margin of safety.

I do think that if the AI market keeps heating up and Nvidia continues to fire on all cylinders as it has been lately, we could see the stock price not only maintain its current level but potentially move up strongly even from here.

But as an investor, I do not feel comfortable that the current price offers me sufficient margin of safety in case some of the risks I mentioned above come to pass.

So,  for now, I have no plans to invest.

Just like the 12 months that preceded it, 2024 was a vintage year for Rolls-Royce (LSE: RR). While Rolls-Royce shares were not the best performer in the FTSE 100 index, as they had been the prior year, they were still on rip-roaring form.

Over the past year, the aeronautical engineer’s share price has soared 94%.

Looking over five years, the company’s pandemic-era existential crisis now seems a long time ago. Rolls now stands 165% higher than it did at this time in January 2020. That was before the pandemic started to make the City nervous.

So, having almost doubled over the past year, could the Rolls-Royce share price do the same again in the coming 12 months? Or might it halve, taking it back close to where it stood a year ago?

The doubling scenario

At first glance, the prospect of the share doubling seems far-fetched. After all, this is a mature company in a mature industry that has already soared over the past couple of years. I, for one, would be surprised to see this happen in the coming year, although that does mean it cannot.

However, there is a case to be made for this scenario.

The current price-to-earnings (P/E) ratio is 22. That does not strike me as cheap. Then again, it is substantially cheaper than other engine makers such as New York-listed peers GE Aerospace (sitting at 33) or Pratt and Whitney owner RTX (36).

Part of that disparity can be explained by the generally lower valuations in the London market currently, compared to US peers. Still, Rolls could move up substantially (though not double) without being more expensive on a price-to-earnings basis than key rivals.

There is another possible lever for a big leg up in the Rolls-Royce share price and that is improved earnings.

In that case, even maintaining today’s P/E ratio, let alone a higher one, would imply a higher price. Both basic and underlying earnings per share showed a marked jump in 2023 compared to the prior year.

Last year’s annual results should come out next month. They will include details on how the engineer is progressing against its ambitious medium-term financial targets.

If the company delivers strong further improvements in earnings, I think that could help propel the shares higher.

The halving scenario

I doubt those results will disappoint significantly, or we would likely have had a profit warning before now.

But one thing that could send the share price down is if the company signals that it looks unlikely to meet its self-imposed targets over the next several years. It has been an inconsistent performer for decades, so I do see that as a credible risk.

One challenge of trying to boost earnings is that, after the initial cost cuts (themselves posing reputational risks in a safety-critical industry), pushing up selling prices can lead customers to shop around more.

A key risk that I think could lead to the shares halving is a sudden external shock that leads to a dramatic slowdown in civil aviation demand. This is why I will not invest at today’s price.

The pandemic was an example, but such a shock could also be a volcanic eruption grounding flights, or terrorist attack.

The US market has powered higher since Donald Trump’s election back in November. He has promised a new American “golden age” centred around tax cuts, deregulation, and economic growth. The good news for UK investors is that some London-listed stocks are set to benefit, including in the FTSE 250.

Here are two that could march higher while Trump is in the White House and that I think are worth considering.

4imprint

The first stock is 4imprint Group (LSE: FOUR). This £1.5bn company sells custom-branded promotional products to help customers enhance brand visibility. These items include personalised merchandise like clothing, stationery, mugs, and more.

Lower corporate taxes are likely to benefit small and medium-sized businesses in America, where 4imprint generates 97% of its sales. Its customers range from Fortune 500 companies to small charities and family businesses. Many will probably now feel confident to invest more heavily in brand promotion, benefiting market leader 4imprint in the process. 

Yesterday (21 January), the company reported a solid trading update for the year ending 28 December. Revenue is expected to have increased 3% to $1.37bn, while pre-tax profit is anticipated to be no less than $153m (at least 8.5% higher and at the upper end of analysts’ forecasts).

Such growth might not seem particularly impressive, but it’s important to remember that the firm has been operating in challenging market conditions. Inflation and interest rates have been high. While there’s definitely a risk such weakness could persist, there’s also a chance that 4imprint’s growth will accelerate if the US economy starts growing strongly.

An attractive thing here is the company’s capital-light model. Most orders are drop-shipped directly from its suppliers to customers, which minimises the need for inventory. Indeed, 4imprint’s return on invested capital (ROIC) is above 80%, which is incredibly high. 

Also, the North American promotional products market is estimated to be worth around $26bn, but the company only commands just over 5% of it. So there is the potential for further market gains given the highly fragmented nature of the industry.

Finally, the stock is trading at 14.6 times next year’s forecast earnings while offering a forward dividend yield of 4%. That looks good value to me.

Betting on US growth

The second stock that looks well placed to benefit from a Trump administration is Baillie Gifford USA Growth Trust (LSE: USA). As the name suggests, this trust invests in growth businesses found across the pond, including unlisted ones.

Trump has promised to deregulate industries to unlock innovation and growth. This should ultimately benefit many of the portfolio’s top holdings, including Tesla (robotaxis), Nvidia (artificial intelligence), and SpaceX (rocket launches). Other innovators include Amazon and Shopify.

One thing worth highlighting here is that US activist hedge fund Saba Capital has taken a large stake and wants to overhaul the trust’s board. There’s a shareholder vote on it next month. Baillie Gifford says Saba’s proposals would be “value-destructive“.

The hedge fund has criticised the trust’s poor performance. However, for the six-month period that ended 30 November, the net asset value return was 29.4%, compared to a total return of 15.3% for the S&P 500 (in sterling terms). So the criticism seems exaggerated to me.

Looking ahead, I think the portfolio of high-quality growth stocks is set up for strong gains and is worth considering.

It has been a busy 24 hours for Netflix (NASDAQ:NFLX) shareholders, with the release of the latest set of quarterly results. The earnings were released after the US market closed for the day (21 January). The Netflix share price has rocketed higher in post-market trading. Based on the results, I can see some clear reasons why.

The share price movement

Some might be a little confused about how the stock price could move when the market is officially closed. The reason for this is that it’s possible to buy and sell stocks even when the stock exchange is closed. The exchange does allow it, but the transactions are booked off-exchange and mainly bought and sold by experienced institutional clients, such as hedge funds. It’s not something the vast majority of retail investors can do. Yet it does provide us with a good indication of how the stock could trade when the market does reopen.

For Netflix, the results saw the share price shoot higher, up over 14% ahead of the market open. Should the price manage to hold around this level when it does open, it would mark a fresh all-time high for the US stock.

Details of the results

The business managed to add a record 19m subscribers during the final quarter of the year. This was in part thanks to the content slate, ranging from NFL games and the Jake Paul vs Mike Tyson boxing match to the much anticipated Squid Game 2. The bump in added subscribers means that it surpassed 300m for the year, a 15% increase. This was more than analysts were expecting, which is one reason for the size of the stock price jump.

As well as beating revenue and profit forecasts, the outlook going forward provided another reason for investor optimism. Management raised the revenue forecast for this year by $500m. Advertising revenue is expected to double in the coming year, having already doubled over the past year. If the company can deliver on this, the growth of the firm could warrant a higher share price.

What could happen next

The stock is already up 79% over the last year, ignoring the move overnight. Despite the good news from the results and the outlook, there are risks ahead that are worth mentioning. For example, some are concerned that subscription numbers could start to tail off, especially if Netflix can’t continue to provide the content quality seen last quarter. Netflix will stop reporting subscriber numbers going forward, so it’ll become harder to gauge this part of the business.

Another risk is the hyper-competitive industry that it operates in. There’s certainly no room to get complacent!

Despite these concerns, I’m very impressed with the results. Based on the upbeat view for the coming year, I’m strongly thinking about adding the stock to my portfolio shortly.

There are a few ways to generate passive income nowadays. Some are a bit wacky, including selling advertising space on your body. A more conventional one I use is buying shares in blue-chip companies to receive dividends.

Using this time-honoured method, I can benefit financially from the competitive advantages of already successful companies.  

To illustrate, here’s how a long-term investor could target £550 of passive income each month by investing £20,000 in a Stocks and Shares ISA. 

Where to start hunting?

The first place that UK investors often turn to for dividend-paying shares is the FTSE 100. This makes sense, of course, as the index is made up of many blue-chip companies that have been dishing out dividends for decades.

That doesn’t mean they always will or will do so every single year. Even Tesco and Lloyds have cancelled payouts in recent times (following a 2014 accounting scandal and during the pandemic, respectively). This shows that dividends aren’t always assured.

Nevertheless, I think the FTSE 100 is a sensible place to start hunting for income shares. Most of the firms have large customer bases, very established business models, and prioritise paying generous dividends to shareholders.

Passive vs active investing

The FTSE 100 Index yields around 3.5%, which is much higher than the growth-driven S&P 500. It means an investor could buy an index tracker to immediately target £700 in annual dividends from a £20,000 investment. This is known as passive investing — owning all, or a representative selection of, the stocks in an index rather than picking and choosing.

However, an investor can currently get a higher yield than 3.5% from simply buying UK government bonds or putting cash into a risk-free savings account.

An active approach, which is how I invest, involves choosing individual shares to target a higher return. Take Aviva (LSE: AV.), for example. I own shares of this UK insurance and asset manager primarily because of the 6.7% dividend yield that it offers.

Right now, the company is doing really well. In the third quarter, general insurance premiums were up 15% while net flows of £7.7bn to the wealth line of business were 21% higher. Impressively, it now has 5m UK customers with more than one policy. 

CEO Amanda Blanc commented: “Quarter after quarter, we are delivering consistently superior results and growing Aviva, particularly in the capital-light businesses.”

Naturally, the company would be exposed to any severe economic downturn, as this might force cash-constrained customers to cancel policies. That would be a risk to earnings and dividend growth.

However, despite rising nearly 10% already in 2025, the stock is still trading cheaply at 10.6 times earnings. And the forecast yield for 2025 is a juicy 7.6% (around double the FTSE 100 average).

Currently at trading at 510p, I think the shares offer a lot of value.

Compounding

If an investor built a £20k portfolio of stocks yielding an average 7.6%, the annual passive income would be a much improved £1,520.

To really maximise the income opportunity though, an investor could consider compounding those gains over time. In other words, reinvesting dividends instead of spending them.

In this scenario, after 20 years, the ISA portfolio would be throwing off tax-free income of approximately £550 a month, on average. That would be without investing any extra outside cash.

Obviously, these figures would ideally be far higher with regular investments made along the way.

Banking giant Lloyds (LSE:LLOY) has traditionally been one of the most popular shares among UK investors. This is thanks in large part to its reputation as a rock-solid passive income stock.

Yet the FTSE 100 company has fallen well down the charts in recent months. Despite the prospect of more market-beating dividends, investors have still turned away from the bank in substantial numbers.

As the table below shows, City analysts expect cash rewards on Lloyds shares to keep rising, meaning the dividend yield remains well above the FTSE average (of 3.6%) over the short term.

Year	Dividend per share	Dividend growth	Dividend yield
2025	3.43p	5%	5.6%
2026	4.01p	17%	6.5%

However, it’s important to remember that dividends are never, ever guaranteed. And over the next couple of years the bank faces a significant threat that could deliver a hammerblow to dividends.

So how realistic are these dividend estimates for Lloyds, and should I buy its shares for passive income?

Strong measures

The first thing to consider when assessing any dividend share is how well predicted dividends are covered by anticipated earnings. A figure of two times or above provides a wide margin of error in case profits come in below forecast.

On this front the Black Horse Bank scores well. For 2025 and 2026, dividend cover comes in at 2 times and 2.2 times respectively.

The next factor to look at is balance sheet strength. For banks, a good gauge of this is the common equity tier 1 (CET1) ratio. On this front Lloyds also looks good.

As of September, its capital ratio came in at 13.6%, a comfortable distance above capital requirements.

Cost uncertainty

So far so good, then. But while these standard measures are encouraging, there’s another important thing to consider in the case of Lloyds: the potential for whopping misconduct charges, this time over the issue of mis-selling car finance.

The FTSE firm had, in early 2024, set aside £450m to cover potential costs. But it put this amount under review in October, after the Court of Appeal ruled that undisclosed fees from finance providers to car retailers was unlawful.

The banks have received better news on this in recent hours, however. To avoid a meltdown in the car loans market, the Treasury has said it will express concerns over potential sector costs to the Supreme Court when it reviews the case.

But right now the risk of whopping costs related to the Financial Conduct Authority (FCA) probe remains significant. Morgan Stanley estimates this could total £30bn, while HSBC puts it at an even-higher £44bn.

As the sector’s largest player, Lloyds could be on the hook for a whopping share of any hit.

Here’s where I stand

For this reason, I’m happy to leave Lloyds shares on the shelf today. As well as impacting future dividends, a colossal mis-selling bill could also crash the bank’s share price.

Signs of recovery in the housing market are great news for the Black Horse Bank more recently. But on balance, things remain pretty bleak for the bank as the UK economy struggles and more misconduct costs loom large.

On balance, I’d rather find other high-yield dividend stocks to buy.

Aiming for a second source of income is never a bad idea. There are many ways to try and do this, ranging from property to Government bonds. Yet as an experienced stock investor, I believe that the stock market is one of the best ways. When using an ISA, an investor can boost their dividend potential, providing the source for income. Here’s how.

An ISA can be a great tool as it allows an investor to maximise the net proceeds from a dividend payment. What I mean by this is that dividends received within an ISA aren’t subject to dividend tax. So the gross payment amount from the company is all ours. Even though this might not seem like a big thing, when we compound income payments over years it really is a big advantage.

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.

A second income like this can be made by picking dividend stocks that are sustainable in nature. There’s little point in selecting a stock that has a crazily high yield that’s only because the share price is falling rapidly. In that case, the dividend might get cut in the near future, causing the yield to drop. Rather, investors can look to target stocks with a generous yield. But they should look for those where there’s a good track record of paying it out over several years.

A reliable payer

One example of this is Investec (LSE:INVP). The FTSE 250 bank has a current yield of 6.47% and boasts a record of continuously paying dividends for over two decades.

The strong yield isn’t due to a falling share price. Rather, the stock price is up 8% over the last year. It has benefitted from interest rates remaining higher for longer. This has meant that its net interest income earned hasn’t fallen as expected, with the latest half-year results showing it actually increased by 2% versus the same period the previous year. Aside from that, the 13% rise in fee and commission revenue from the sale of financial products to private and corporate clients helped to boost profitability.

As long as the business continues to be profitable, I don’t see the dividend as being under threat. One risk is the rising expected credit losses. The expected impairment charges in the latest report were £66.9m, up from £46.3m from the year before.

Breaking down the figures

An investor could consider building a portfolio of sustainable stocks like Investec with an average blended yield of 6.5%. The results could be impressive. If they invested £750 a month and reinvested the dividends for 15 years, the pot size could reach £229.6k. This means that in the following year, it could generate £14.9k in income, averaging £287 a week.

There’s a need to be careful in putting too much faith in forecasts. But there’s good long-term potential for income generation in this strategy.

The past few weeks have seen a minor turnaround in the share price of BP (LSE BP). BP shares are up around 13% since  the week before Christmas, after having been in a long downwards trend since April.

Still, over five years the BP share price has fallen 12%. That compares to a 24% increase in price for rival Shell during that period.

Sure, it offers a 5.6% dividend yield. But Shell offers 4%. Across the pond, Dividend Aristocrat Exxon Mobil offers 3.6% and has seen its share price grow by 68% over five years.

So, might the recent rise in BP shares suggest that is starting to close the valuation gap with its competitors?

BP’s emerging from a strategic fog of its own making

A key reason the company has lagged Shell and especially Exxon is what I regard as a self-inflicted wound.

Some years ago it made a big brouhaha about shifting its product mix towards one that was much less reliant on fossil fuels and emphasised renewable energy. Shell did something similar on a less ambitious scale, while Exxon has largely stayed the course as an oil and gas company.

The economics of that transition never convinced the market. BP under its current management has started to tack towards a less aggressive move away from fossil fuels.

Increasing clarity around that has helped to renew some investor confidence in the firm, as far as I can see.

Trading remains unremarkable

So, what has boosted the share price in recent weeks?

Last week the company issued a quarterly trading statement. But its contents were neither especially exciting nor worrying.

Net debt was expected to end the quarter lower than at the end of the prior quarter, while upstream production was expected to be lower. There were also some negative currency exchange and tax rate revisions to the guidance for the full year.

So, none of that besides the net debt reduction is good — but nothing jumped out at me as especially bad either.

The share price looks potentially undervalued

I think the recent share price turnaround could simply reflect a dawning realisation in the City that the BP valuation had drifted lower than it deserved.

Its market capitalisation of £68bn is hardly cheap, but it is less than half of Shell’s. It is also less than six times last year’s earnings.

Admittedly the company’s earnings have swung around wildly in recent years. But a clearer strategic focus on areas where it has proven expertise and valuable assets bodes well for BP’s future earnings, in my view.

From a long-term perspective, for BP’s collection of energy assets, long business experience, strong brand and extensive downstream marketing operations worldwide, I think the current price looks like a potential bargain.

That does not necessarily mean it will keep going up. The company has more work to do on delivering against a more focused strategy and even then its fortunes will always be largely tied to the oil price, which tends to crash from time to time.

But I do see ongoing value potential here and plan to hang on to my BP shares, hopefully collecting those juicy dividends regularly along the way.

The past few months have been incredible for shareholders in electric vehicle maker Tesla (NASDAQ: TSLA). Tesla shares are now worth 98% more than they were in October. While that is remarkable growth – especially given the scale of the company – over five years things have been even better. Tesla stock has risen 1,026% during that period.

But despite the meteoric ascent of the past few months, is there anything left in the tank that might push the share price even higher?

Great company with a proven business model

I think there are multiple reasons to like Tesla.

A few years ago, it was a lossmaking company still trying to establish that there was a viable market for electric cars in general and its models in particular.

Fast forward to today and how things have changed.

Tesla shifts tens of thousands of cars each week on average. It has a powerful, well-known brand and a well-oiled manufacturing network. The carmaker has millions of existing customers and continues to develop proprietary technology that could help it open up new revenue streams, such as self-driving taxis.

Not only that, but Tesla is more than just a car company. It has proven its ability to use its battery expertise to install power storage solutions at scale. That is already a big business for the company — and looks set to keep growing at a fast clip.

The market is changing around Tesla

All of that said, I do see some risks for the firm.

A key one is the rise of sophisticated competitors that have their own proprietary technology. NIO has an interesting battery swapping service, but the company’s business model remains unproven, in my view.

By contrast, BYD (in which Warren Buffett is a long-term investor) substantially outsold Tesla last year in terms of vehicle numbers.

As the electric vehicle market has matured, Tesla’s distinctiveness has been harder to maintain – and so has its pricing. I see further competition as a risk to profit margins at Tesla.

The valuation leaves no margin for error

In itself, that is not necessarily a bad thing. It proves the market for electric vehicles is here to stay. Some competition can help keep Tesla on its feet.

As an investor, though, it does affect my take on the shares. While I like the business, I do not like the current valuation.

A price-to-earnings ratio of 116 means that if an investor took over the company at today’s valuation using an interest-free loan it would take more than a century’s worth of earnings just to repay the purchase price.

That seems far too high to me. Tesla’s earnings face risks including the ones I mentioned above. I do not think the current valuation provides any margin of safety at all for me as an investor.

Sure, momentum and investor enthusiasm might push the shares higher in the short term.

As a rational long-term investor, however, I do not think the current outlook for the company merits the price tag. I have no plans to buy Tesla shares for my portfolio at the current price.

This morning (22 January), FTSE 250 pub chain JD Wetherspoon (LSE:JDW) issued a trading update for the 12 weeks up to 19 January. And the stock’s down slightly in response.

Overall, the report was mixed, with like-for-like sales up 4.6%. But the real focus for investors at the moment is on the company’s ability to manage its costs.

Sales

The latest update from JD Wetherspoon follows a few other reports from pub chains over the last couple of weeks. These include Mitchells & Butlers (MAB) and Fuller, Smith & Turner.

Like-for-like sales increased 3.9% at MAB and 5.9% at Fuller’s. So the Wetherspoon’s update is roughly in the middle of the field. 

In the context of inflation levels at around 3.5%, those results are steadier than spectacular. But the real focus for investors is on the company’s ability to control/offset higher staffing costs.

After the government Budget, chairman Tim Martin estimated that the impact of higher National Living Wage and Employers’ National Insurance would be around £60m. And that’s a lot for this business to swallow.

Higher costs

Investors might be worried that Wetherspoon’s low customer prices limit its ability to offset higher staff costs. But that’s not the approach the Martin took in his comments. 

Instead, he chose to focus on the impact on the pub sector as a whole compared to supermarkets. With higher staffing expenses, hospitality venues stand to see a bigger impact from increased costs. 

To me, this shows two things. The first is the firm doesn’t have much to worry about in terms of competition from other pub chains – if prices go up across the industry, it will still be below its rivals.

The other is that, while Wetherspoon’s might have lower costs than other pubs, it’s at a disadvantage compared to supermarkets. And that’s a much bigger risk for investors to be aware of. 

Outlook

Wetherspoon’s hasn’t offered guidance for profitability over the full year. It’s going to wait and see how the impact of higher costs manifests itself – but beyond this, I see reasons for optimism. 

I think offering better value than competitors is likely to have a durable appeal with customers. And the company’s ability to do this is well-protected, giving it a strong competitive position.

Investors however can’t overlook the fact that Wetherspoon’s operates in a discretionary sector. The tax disadvantage compared to supermarkets is a long-term challenge for the business.

In my view though, the pressure on the industry as a whole might well mean that stronger operators get stronger as weaker competitors come under pressure. And that could be good for the firm.

I’m a buyer

The challenge of higher staffing costs does bring with it a positive. A higher National Living Wage might mean people have more money to spend – and this could be positive for the company.

Martin’s update wasn’t particularly optimistic – but then again, it almost never is. I think JD Wetherspoon’s a durable business and I’m looking to add to my investment at today’s prices.