The FTSE 250, often overshadowed by its larger counterpart, the FTSE 100, may be ready for a turnaround in 2025. This index of mid-cap companies has weathered a perfect storm of challenges, including higher interest rates and a sluggish British economy. These have weighed heavily on its performance — it’s down 5% over five years. However, as we enter a new phase of monetary policy (falling interest rates), the unloved FTSE 250 could present an opportunity for investors to generate significant wealth.

Good omens

The FTSE 250 has typically outperformed during periods of falling interest rates. As the Bank of England embarks on a rate-cutting cycle, this trend could reassert itself. During previous rate-cutting periods, such as 1992-1994, the FTSE 250 delivered an impressive 87% total return, significantly outpacing the broader market.

The potential for outsized returns is further supported by projections for earnings growth. In 2025, FTSE 250 companies are forecast to grow earnings by over 18%, compared to just 9% for FTSE 100 firms — that’s according to research from abrdn. This disparity in growth prospects could drive investor interest towards mid-cap stocks.

Picking winners

Some sectors and companies will be more exposed to prevailing economic conditions than others. While some investors will prefer investing in index trackers funds, others may see an opportunity to beat the market. This could mean investing in companies that are more exposed to changes in interest rates.

Banking stocks, such as Close Brothers Group, may see improved lending activity and profitability. Meanwhile, retailers like Frasers Group could also receive a boost as consumer spending potentially increases.

However, it’s important to recognise that the index has heightened sensitivity to domestic economic conditions. This means it can be more volatile than the FTSE 100. Moreover, developments like the recent depreciation of the pound could push up costs for many businesses, notably those that import products and sell to UK consumers.

One to consider

Hollywood Bowl (LSE:BOWL) is an interesting prospect for FTSE 250 investors. The seven analysts covering the stock currently have a median target of 404.1p, with a high of 440p and a low of 288p. This median estimate represents a 40% increase from the current share price.

Berenberg recently said Hollywood Bowl was “best in class”, noting strong fundamentals, a good management team, and a solid runway for growth. This was issued after the company reported record revenues for the year in December.

However, like many businesses, it expects a tax hit from the October budget. It also recently took a £5m impairment on its mini-golf operations. Nonetheless, forward guidance remains pretty strong and the leisure facility owner has a plan to almost double its site number over the next decade.

From a valuation perspective, the figures are rather strong. It’s trading at 14.4 times expected earnings for this current year, and that falls to 11.4 times for 2027. This, combined with a 4.2% dividend yield, means I’m actually very intrigued by this proposition. I’m not buy now, but I’m going to add this one to my watchlist.

I wouldn’t say this stock offers investors the chance to get rich, but it could put them on the path to greater wealth creation in 2025.

BP (LSE:BP) shares are back in high demand as oil prices lift off again. At 429p per share, the FTSE 100 fossil fuel giant is up 6.4% so far in 2025, and is the most purchased UK or US share among Hargreaves Lansdown investors in the past seven days.

Yet despite BP’s share price upturn, it still carries a significantly higher dividend yield than most other Footsie companies.

At 6.3%, the driller’s dividend yield for 2025 soars past the blue-chip average of 3.6%. And for next year the yield ticks up to 6.5%.

However, brokers’ earnings and dividend forecasts are known to sometimes miss their mark, both on the positive and negative side. So how realistic are BP’s current dividend forecasts? And should I consider buying the FTSE firm for my own portfolio?

The good

It’s important to remember that dividends are never, ever guaranteed. And that sometimes a crisis comes along that’s so severe it can devastate a company’s payout policy.

After the Covid-19 breakout in 2020, BP cut the annual dividend not once but twice. Even Shell — which hadn’t reduced shareholder rewards at any point since the Second World War — took the hatchet to dividends.

Notwithstanding another cataclysmic event, BP looks in good shape to meet broker forecasts based on potential profits.

For 2025 and 2026, predicted dividends are covered 1.9 times and 2.1 times by anticipated earnings. Both figures are in and around the safety benchmark of 2 times that’s so craved by investors.

The bad

However, a look at BP’s balance sheet paints a less reassuring picture for dividend chasers.

While cash flow remains solid, the business is struggling to get its large debt pile under control. Net debt rose another $1.9bn year on year to reach $24.3bn as of September 2024.

This reflects in part the high capital expenditure that oil exploration, development and production requires. BP spent $12.5bn during the nine months to September, and costs are likely to remain around these levels until the end of the decade at least.

These debts are serviceable right now, as illustrated by BP’s determination to pay market-beating dividends alongside launching further share buybacks. However, this could turn around very quickly if oil prices weaken and company profits come under pressure.

The ugly?

While crude prices are rising today, the outlook for the rest of 2025 — not to mention 2026 — is less than assured. Rising non-OPEC supply and weak Chinese demand both pose an ongoing threat to crude prices. A possible reversal of OPEC+ production curbs also continues to loom large.

As a long-term investor, I’m not just concerned about BP’s dividend prospects over the next two years. I also worry about the oil giant’s capacity to keep paying large dividends as renewable energy demand steadily grows and sales of electric vehicles increase.

The FTSE 100 is packed with shares carrying high dividend yields. Given BP’s uncertain profits outlook and debt-heavy balance sheet, I’d rather choose other large-cap income shares to consider.

Dividend stocks are a popular way to earn passive income on the stock market. The regular payments made to shareholders can equate to a decent flow of cash.

When investing in dividend shares, early investors often fall foul of some common mistakes.

Here are two to keep in mind.

Not all companies are created equal

There’s no shortcut when picking dividend stocks and no single model that applies to all companies. When considering investing for dividends, the individual strengths and weaknesses of reach company must be accounted for.

This is particularly true when it comes to dividend coverage. This metric is used to assess how much cash the company has to cover its dividend obligations. Presumably, if its cash is less than the full amount of dividends, there’s going to be a problem.

Companies that need steady cash flow to operate typically pay a low dividend and as such, have high coverage. However, some companies don’t need much cash to operate and so pay a high dividend with low coverage. This reveals how low coverage isn’t necessarily a bad thing.

It’s important to find out how the company operates before making a decision based solely on coverage. Even a company with high coverage may cut the dividend if it has a lot of debt to finance.

These factors differ from company to company, so each one needs to be assessed on an individual basis.

Investing for the yield

Investing purely for the yield isn’t a good long-term strategy. Yields fluctuate wildly and are often high for the wrong reasons, such as a crashing price. 

Some investors buy stocks just before the ex-dividend date as a way to lock in a yield at a certain level. This can be a smart strategy but doesn’t guarantee anything. Ignoring the company’s fundamentals and potential price movements is risky. If the stock falls more than the yield before payment, then it’s all for nothing. 

Before making a decision based on the yield, investors should always carefully assess the company’s financial position.

Examples to consider

In 2023, Vodafone had one of the highest yields on the FTSE 100, at 10.8%. But falling earnings forced it to slash the dividend in half, bringing the new yield closer to 5%. Investors who bought for the yield and didn’t foresee the problems would have been disappointed.

Fellow telecoms giant BT Group currently has a yield of 5.7% and sufficient cash to cover dividends. However, it’s drowning in £18.9bn of debt, ramping up the possibility of a dividend cut in the near future.

The specialist staffing company SThree (LSE: STEM) looks more promising and may be worth considering. It has a 5.8% yield that’s well-covered by cash flows. Additionally, its cash has almost doubled since 2021 while its debt has decreased. Annual dividends have also increased from 11p to 16.9p per share.

But a challenging job market led to a profit warning last month that spooked investors. An expected 61% decline in pre-tax profit caused the stock to crash. Now with a price-to-earnings (P/E) ratio of only 6, it looks attractive. But if the market doesn’t recover, it could still fall further.

Still, I like its long-term prospects. Revenue has been climbing for several years and analysts forecast on average a 30% price increase in the next 12 months.

Passive income’s becoming increasingly focused on by some investors. I think this is partly due to ongoing concerns about the UK economy and job security. It also could be to do with the fact that we are an ageing country, so income into retirement’s on people’s mind. Whatever the case may be, using the stock market to build such a cash stream’s possible.

Different avenues to take

To make sizeable passive income from stocks, there are three main routes to go down. One is to buy growth stocks with the aim of getting large scale share price appreciation. Over time, the profits from the rising stock price can be trimmed, enabling an investor to bank a portion of the profits and using this as income.

A second option is to invest in dividend stocks. These typically pay out income via a dividend a couple of times a year. With a pot of several income shares, it’s possible to receive some cash each month. Of course, dividends aren’t guaranteed, so investors need to be careful in assuming that the current dividend payments will continue into perpetuity!

Finally, a strategy can be to merge the two together. In practical terms, this means having a mix of growth and income stocks in a portfolio. Then there’s flexibility to generate cash proceeds both from potential share price movements as well as dividend payments.

Income and growth

Some stocks could offer the best of both worlds for a potential investor to consider. For example, PayPoint (LSE:PAY). The UK-based company provides convenient payment and retail solutions, with most of us likely having used the service at a local shop or petrol station.

Over the past year, the stock’s rallied by 40%, with a dividend yield of 5.53%. In this sense, it could offer an investor both the growth element and also income. It’s not a new business, but has the scope for further expansion.

In the half-year results, it spoke about how the “strategic investments made in Yodel and obconnect strengthen two core areas of our business, enhancing future growth and opportunities in parcels and Open Banking”.

It’s true that there are many avenues the company could go down to grow further. With the business posting a half-year profit before tax of £23.1m, I don’t see the dividend under any immediate threat. However, one risk is that should the company want to fuel a future acquisition or expand in a new market, management might decide to retain the dividend for a period to help fund this.

Talking numbers

If an investor could put away £500 a month and obtain an average yield of 8% from the portfolio, the total size could increase over time. After 15 years, the pot could be worth £174.6k. This means that in the following year, even without adding any fresh money, it could generate an investor £1,164 each month, on average.

Of course, these numbers are by no means guaranteed. But it does highlight roughly the size of investment and the target return needed to try and make this strategy work.

As volatility rattles global markets, investors are considering steps to protect their portfolios. While a stock market crash sounds scary, being prepared can potentially turn it into an opportunity.

Here are three tried and tested methods of investing during a crash to make the most of it.

Diversify effectively

Diversification doesn’t just mean picking 10 or more varied stocks. To be truly diversified, I believe an investor should think about owning a mix of assets from different classes, sectors and regions. This helps to cushion the portfolio from a downturn in any one area.

Ideally, it should include a mix of equities, bonds, real estate and commodities, in my opinion. For example, bonds and commodities often perform well when stocks decline, providing balance to a portfolio. 

A variety of industries is equally important. While technology stocks might be volatile, consumer staples and healthcare sectors tend to be more stable during market fluctuations.

Finally, look at a few international investments to avoid being overexposed to any one country’s economic situation.

Consider defensive stocks

Defensive stocks are shares of companies that provide consistent dividends and stable earnings regardless of the economic climate. They typically operate in essential industries such as utilities, healthcare and consumer staples.

Examples to consider include consumer staples company Unilever, energy supplier National Grid and pharma giant GSK (LSE: GSK). All provide essential services or products that typically remain in high demand at all times.

As one of the UK’s leading pharmaceutical companies, GSK has a solid portfolio and extensive pipeline of products in development. Most recently, its drug Jemperli was approved by the European Commission to treat endometrial cancer. At the same time, it faces the risk of losses from patents expiring and generics flooding the market.

Last week, it entered an agreement to purchase Boston-based clinical-stage biopharmaceutical company IDRx for $1bn. While the acquisition could be hugely beneficial, there’s a risk it doesn’t pay off. That could cost the company dearly, leading to losses and hurting the share price.

But with earnings expected to increase, it has a forward price-to-earnings (P/E) ratio of 10, suggesting room for growth. What’s more, it boasts a higher-than-average dividend yield of 4.8%, injecting added value into the investment.

Maintain a cash reserve

Allocating a portion of a portfolio to cash or cash equivalents provides flexibility during a market crash. This reserve makes it possible for investors to seize opportunities when high-quality stocks are selling at a discount due to the downturn.

It also helps to ensure spare funds are available to avoid having to sell any assets at a loss. Watching a portfolio’s value plummet can lead to panic and irrational decisions, particularly if too much money is at stake. Legendary investor Warren Buffett has been building up a cash reserve recently, leading many to speculate about where the market is headed.

Long-term view

While it’s impossible to predict market movements with certainty, implementing defensive strategies can help to avoid catastrophic losses. Investors who are better prepared for potential market dips are more likely to remain calm and avoid making rash decisions.

An investment journey should be approached with a long-term view, during which time a strategy must adapt to meet changing conditions. Keeping up-to-date with political events and economic trends is key to making sound financial decisions.

Making money from financial investments is the truest form of passive income there is, in my view. Passive income means earnings generated with minimal effort, such as with dividends from shares or interest from bonds.

The only real effort involved is picking the right share or bond in the first place and then monitoring its progress periodically.

Much excitement has been seen recently from a spike in UK government bond yields. Those yields have jumped to around 4.7% on the benchmark 10-year bond, known as the ‘risk-free rate’.

As I have large holdings of these, I am as happy as the next bondholder. However, this does not mean that I will be moving all my money currently in stocks into these.

Shares chosen for their passive income potential can generate much greater returns than UK government bonds even now.

Three qualities I want in passive income stocks

The first thing I want in passive income stocks is a yield significantly higher than the 10-year UK government bond. As a stock’s yield moves in the opposite direction to its price, this will change frequently.

The second quality I look for is that a share seems very undervalued to me. This reduces the chance of my making a loss on the stock should I ever wish to sell it. This would effectively diminish the overall passive income I had made on the share.

And the third element I require is that the business is strong enough to keep paying the high dividends.

A prime example of these factors at play

On the first element, I bought HSBC (LSE: HSBA) shares when they yielded well over 7%. As the share price has soared since then, the yield has gone down to 5.9% now. That said, this has been more than compensated for by gains in the stock price if I wished to sell them.

On the second, a discounted cash flow analysis shows the shares are technically 55% undervalued, even after their rise. Given their present £8.24 price, the fair value for them would be £18.31. Market vagaries might push them lower or higher than that, but they still look full of value to me.

And finally on business strength, a risk is that the recent decline in UK interest rates will reduce its net interest income. This is the difference between a bank’s income from interest charged on loans and paid out on deposits.

However, HSBC has shifted its strategy from interest-based to fee-based income. This resulted in Q3’s pre-tax profit rising 9.9% to $8.48bn (£6.95bn), way ahead of analysts’ consensus of $7.6bn.

How much passive income can be made?

Investors considering a £10,000 stake in HSBC would make £8,014 in dividends after 10 years. And after 30 years, this would have risen to £48,454.

By then, the total HSBC holding would be worth £58,454, which would pay an annual passive income of £3,449.

This is based on ‘dividend compounding’ being used and on an average 5.9% yield over the periods. Analysts forecast the yield will rise to 6.7% in 2025, 6.9% in 2026, and 7% in 2027 but there is no guarantee it will.

Given that all three factors that led me to buy in the first place are still in play, I will be buying more HSBC shares very soon.

Nvidia (NASDAQ:NVDA) was one of the best performing large-cap stocks last year. Over the past year, the share price jumped by 141%, with the market-cap now a whopping $3.37trn.

Yet with all the accolades, there’s a good point being made by some that given the size of the existing move, further gains could be harder to come by. Let’s investigate.

Why the stock jumped so much

The rise of artificial intelligence (AI) has been a key factor in why Nvidia has done so well. More specifically, it’s benefited from generative AI technologies like OpenAI’s ChatGPT. This is because the graphic processing units (GPUs) Nvidia makes are critical for training and deploying AI models. Therefore, it’s currently the go-to provider for companies investing in AI infrastructure.

The huge demand for GPUs meant that financial performance in 2024 was exceptional, both in terms of revenue and profitability. The scale of growth can be seen from the latest quarterly results from November. For the fiscal Q3 period, revenue hit $35.08bn. This was up 94% from the same quarter the previous year!

A higher benchmark

Last month, I wrote about how 2025 could be harder for Nvidia. This isn’t purely based on the business having higher competition. Rather, the bar’s now set so high for financial performance and processor enhancements that it’ll be almost impossible to impress investors.

For example, take the 94% growth in revenue from November. If the next quarterly results show an increase of say 10%, I expect this could cause some panic from investors. Yet for most businesses, 10% revenue growth versus the last year would be something to celebrate.

These lofty expectations could hinder further growth potential for the stock. This could happen even though the business as a whole could keep growing and expanding.

Talking about valuations

With a price-to-earnings (P/E) ratio of 54, it’s not a cheap stock. This doesn’t mean that the share price can’t increase further, but it’s unlikely to repeat the same rally as the past year. For example, if the share price doubled but the earnings per share stayed the same, the P/E ratio would be over 100. In my view, that would be a red flag as a very overvalued stock.

However, Nvidia’s a very unique company. It really is the go-to business for anyone wanting to tap into AI. There’s still a huge amount of potential and adoption that still needs to happen in this sector. So the share price could keep rallying, being fuelled less by fundamental reasons and more by the desire by investors to not miss out.

I won’t be buying Nvidia shares right now. Although I think the company has more growth ahead, I feel there are more attractive AI stock options out there.

International Consolidated Airlines’ (LSE: IAG) share price has risen 129% from its 5 March 12-month traded low of £1.41.

However, just because a stock has risen so much does not have to mean there is no value left in it now. It may be that the fundamental business is simply worth more now than it was before. Or the market might just be playing catch up to the true value of the firm.

In fact, in my experience as a former senior investment bank trader, it may be worth even more than the current share price implies. This is certainly true in IAG’s case, I feel.

Has the business fully bounced back from Covid?

Just before the onset of the global pandemic in early 2020, IAG shares were trading around £6.15. So today’s price represents a 47% discount to that.

This discount now looks unjustified to me. In the last full year before Covid struck – January to December 2019 – IAG’s operating margin was 11.9%. Its operating profit in that year was €3.3bn, and its net debt was €6.4bn.

In its full-year 2023 report, its operating margin had returned to 11.9%, and its operating profit was higher (€3.5bn). Its net debt had shrunk from the previous year, but was still higher than 2019’s, at €9.2bn.

Crucial for me was that in the nine-month 2024 report, this net debt figure had shrunk to pre-Covid levels, at just €6.2bn.

Consequently, I see no good reason why this 47% portion of the IAG price discount is still in place.

How undervalued are the shares?

The first part of my pricing assessment focuses on IAG’s price-to-earnings ratio valuation compared to its core competitors. On this, it trades at 6.2 against a peer average of 7.2, so the stock looks undervalued on this basis.

The second part of the evaluation looks at where IAG shares should be, based on future cash flow forecasts. Using other analysts’ figures and my own, this discounted cash flow analysis shows the stock is technically 64% undervalued at £3.23.

Therefore, the fair value of the stock would be £8.97. Market unpredictability may push the shares lower (or perhaps higher) than this. But it strikingly underlines to me how much of a bargain they look right now.

The additional value in the stock above its pre-pandemic £6.15 level is based on future forecast performance.

Over the medium term, IAG projects that it will increase operating margins anywhere up to 15% (from the current 11.9%). It also forecasts capacity growth of 4%-5% to the end of 2026.

A key risk to these is the intense competition on long- and short-haul routes from other carriers, I think.

However, consensus analysts’ expectations are that its earnings will increase by 5.9% a year to the end of 2027.

Will I buy the stock?

I am aged over 50 now and am focused on stocks that pay me high dividends. These should enable me to keep reducing my working commitments.

However, I would buy the stock today if I were at an earlier stage in my investment cycle. Earnings ultimately power a firm’s share price (and dividend) higher, and I think they will do so for IAG.

Investing in UK shares is a bit like buying wine from Aldi – people seem to be suspicious, but there’s genuinely good value on offer. But in fairness, it can be hard to tell whether something just looks cheap or is actually a bargain.

One guide to what a stock is actually worth is the company’s book value – the difference between its assets and its liabilities. And a lot of UK shares look cheap on this basis.

Young & Co’s Brewery

Young & Co’s Brewery (LSE:YNGA) doesn’t actually operate any breweries – it runs a chain of pubs and hotels. And the stock trades at a price-to-book (P/B) multiple of 0.6. 

That means investing is a bit like buying £1 coins for 60p. But for investors to get that £1 in cash, the firm would need to liquidate its assets, which it’s currently showing no signs of doing. 

It’s therefore probably more accurate to say investing in Young’s shares is like buying £1 coins in a locked money box for 60p. But I think there are other reasons to like the business and the stock.

The firm owns its pubs outright instead of leasing them, which protects it from rising rents. And its focus on the premium end of the market means it has much higher margins than JD Wetherspoon.

While high margins are a good thing, premium pricing is risky. Young’s plans to pass on the effects of higher staffing costs from the Budget by increasing prices, but these are already relatively high.

I think there’s a real danger this could put customers off. So while I like the business and I’m considering buying the stock, I’m certainly not dismissing this risk.

Dowlais

Right now, shares in Dowlais (LSE:DWL) are trading at a P/B multiple of 0.4. And unlike Young’s, the company is trying to realise this discount by selling off its assets. 

Specifically, the firm is trying to divest its Powder Metallurgy business. This is valued on its balance sheet at £884m, which is a lot in the context of an organisation with a £911m market cap. 

That makes it seem like investors could get all of their money back by selling part of the company, but it’s not quite as straightforward as this. Dowlais has a lot of debt that also needs factoring in.

Even accounting for this, though, I think the stock is clearly undervalued. And the remaining business – which manufactures parts for cars – looks like it’s in a strong position. 

It has agreements with 90% of the leading car companies and is especially well-positioned to benefit from the shift to electric vehicles. I think this is inevitably, which is very positive for Dowlais.

Investors shouldn’t ignore the debt on the firm’s balance sheet as an ongoing source of risk. But I think the potential sale of the Powder Metallurgy business makes this a stock to consider buying.

Bargain prices?

A lot of UK shares trade below the book value of the underlying businesses, but not all of them are bargains. Stocks that look cheap can turn out to be value traps.

I think Young’s is a quality business and Dowlais has a clear plan to generate value for shareholders. That’s why the discount to book value is something investors should take seriously in both cases.

When compared to the S&P 500, FTSE shares in general have delivered underwhelming performance lately. Driven by AI-mania and rallying tech stocks, the US market has seen exceptional growth recently.

However, all that may change soon. Trump has promised sweeping trade tariffs that leave the future of the US economy in question. If things don’t go as planned, the S&P 500’s performance may drop off. Both Goldman Sachs and JP Morgan are bearish about the index’s future, expecting annual growth of only 6% at best over the coming decade. The forecast is partly due to a belief that the index is highly overvalued.

Here in old Blighty, we haven’t seen the eyewatering returns of groundbreaking tech stocks. But we do have a wealth of well-established high-quality businesses with low volatility and reliable returns. As such, a faltering US economy could make way for more impressive growth back home.

Investors may want to consider the following two FTSE stocks as a hedge against potential volatility abroad.

International Consolidated Airlines Group

The parent company of British Airways, International Consolidated Airlines Group (LSE: IAG), has been doing well lately, gaining a massive 122.6% in the past year alone. But the gains only go a short way to recovering losses incurred during Covid: it’s still down 23.6% over five years.

With air travel now back on track and busier than ever, I think the stock has more fuel in the tank. Back in 2018, analysts were optimistic, eyeing price targets as high as 600p for the stock. That would be close to double the current price.

But the threat isn’t gone entirely. Covid taught us a lot about dealing with a pandemic but not enough to stop travel bans should a similar contagion emerge. If that occurs, IAG stock could easily plunge 70% as it did in early 2020. 

Better planning may lessen the impact but some losses would be unavoidable. 

Barring any further travel disruptions, it could reach 600p by 2030. If it does, it would equate to annualised returns of 13.2%.

Alpha Group International

Alpha Group International (LSE: ALPH) is a lesser-known FTSE 250 stock that could benefit from international trade disruption. The company specialises in the management of foreign exchange risk for corporate businesses.

It’s a relatively small, £954.7m-capitalisation company with just less than 500 employees and £53.3m in revenue. But recent growth is impressive, with revenue up 19% year on year and net income up 13.3%. Forecasters expect earnings per share to reach £1.15 by 2026 — a 70% rise from current levels.

If the £22 share price follows suit, it could reach £40 in the next five years, an annualised return of 12.47%. That’s not an unrealistic estimate, considering the share price doubled between the summer of 2020 and 2021. Since then, return on equity (ROE) has climbed from 13.9% to a massive 48.15%.

Despite these impressive figures, growth has been slower recently. This is likely due to economic challenges in the finance sector, particularly high interest rates that curb spending. If rate cuts materialise this year it could help dissipate these issues but if not, growth may stall again.

I think both stocks are worth considering as strong contenders to outpace the S&P 500 by 2030.