The FTSE 100’s Phoenix Group Holdings (LSE: PHNX) has consistently been one of my highest-yielding stocks.

Like many of my share purchases over the years, I bought it when it was deeply out of favour with many investors. And like all my stock buys, I obtained it at a deeply discounted price to what I assessed as its fair value.

Both factors – an extremely high yield and a very undervalued share price – are still in play.

On top of this, analysts forecast the firm’s earnings will rise by a stunning 74% each year to end-2027. And it is precisely this growth that drives a stock’s price and dividends higher over time.

How does the core business look?

A risk to Phoenix Group’s future earnings is the high level of competition in the savings and retirement sector.

Nonetheless, its 2024 results released on 17 March showed IFRS adjusted operating profit rose 31% year on year to £825m. This was way ahead of analysts’ expectations of £734m.

Over the same period, its operating cash generation jumped 22% to £1.403bn. The firm stated that this more than covers recurring uses, including its progressive dividend policy. This is where a dividend is expected to rise at least in line with increases in earnings per share. However, if this falls, the dividend will not be reduced.

Moreover, its £1.779bn total cash generation easily overshot the top end of its previous £1.4-£1.5bn 2024 target range.

Consequently, Phoenix Group upgraded its total cash generation target to £5.1bn from £4.4bn by end-2026. It did the same for its IFRS adjusted operating profit – to around £1.1bn from £900m by the same point.

How undervalued do the shares look to me?

Despite a recent rise in price, Phoenix Group shares still have the lowest price-to-sales ratio of its competitor group. They are currently at just 0.3 compared to their competitors’ 1.5 average.

This group comprises Aviva at 0.7, Legal & General at 1.2, Swiss Life Holding at 1.9, and Prudential at 2.4.

To determine where its price should be, based on future cash flow projections, I ran a discounted cash flow analysis. Using other analysts’ figures and my own, this shows Phoenix Group is 27% undervalued at £5.73.

So the fair value for the stock is £7.85, although market forces could move it lower or higher.

Set to be an even greater passive income powerhouse?

The firm raised its dividend in 2024 to 54p, which yields 9.4% on the current share price.

However, analysts forecast the payout will rise to 55.6p in 2025, 57.4p in 2026, and 58.9p in 2027. These would generate respective yields of 9.7%, 10%, and 10.3%.

Ignoring these projections and using only the current yield, investors considering a £10,000 holding in the firm would make £15,506 in dividends after 10 years. After 30 years on the same average 9.4% yield, this would rise to £155,935.

Adding in the initial stake and the Phoenix Group holding would be worth £165,935. This would pay £15,598 in dividend income a year at that point.

These numbers are also based on the dividends being reinvested back into the stock – known as ‘dividend compounding’.

Given these factors, I will be buying more of the shares very soon.

With the 5 April deadline around the corner, I’m building a list of stocks, investment trusts and funds for ISA investors to consider. Rather than depositing cash and buying later on, I think now could be a good time to think about purchasing them in a Stocks and Shares ISA or Lifetime ISA straight away.

Here’s why.

Babcock International

At 717p per share, I think Babcock International (LSE:BAB) offers exceptional value for money right now. A price-to-earnings (P/E) ratio of 14.2 times for the upcoming financial year (to March 2026) makes it one of tech defence sector’s cheapest operators.

BAE Systems and Senior, for instance, trade on much higher multiples of 22.3 times and 18.1 times respectively.

Babcock provides a wide range of engineering, training and support services to NATO countries including the UK, France and Canada. This gives it an excellent opportunity to grow revenues as spending across the defence bloc rapidly rises. Latest financials showed organic revenues up 11% in the six months to September.

Having said that, the FTSE 250 company could be exposed to a potential cut in US arms spending. Industry peer QinetiQ‘s warning last week of “challenging US market conditions” and subsequent profit warning underlines a potential storm for Department of Defense suppliers.

But Babcock’s far less exposed to defence budgets in Washington than other major defence picks. Just 4% of group revenues come from the whole of North America.

Scottish Mortgage Investment Trust

At 965.6p per share, Scottish Mortgage Investment Trust trades at a 9.9% discount to its net asset value. This deserves serious attention, in my book.

The tech trust’s slumped as investors weigh the potential impact of US trade tariffs on companies such as Amazon, Nvidia and Mercadolibre. Signs of an increasing image problem for Elon Musk — the trust holds shares in both Tesla and SpaceX — haven’t helped Scottish Mortgage’s cause either.

But I think investors should look past this short-term noise and consider buying at current prices. The FTSE 100 trust’s delivered an average annual return of 15.7% as the digital economy has kept rising. I’m confident it will continue producing solid investor profits, driven by fast-growing sectors including artificial intelligence (AI), robotics and quantum computing.

L&G Cyber Security ETF

At £22.06 per share, the L&G Cyber Security ETF has also dipped on fears over trade wars and a slumping global economy. Like Scottish Mortgage, I think this represents an attractive dip-buying opportunity to think about.

Investing in single cybersecurity companies can be highly risky. One system failure can prove disastrous for a company’s reputation and, by extension, for future revenues.

While they don’t eliminate this threat entirely, an exchange-traded fund (ETF) like this L&G product can substantially reduce the risk. In total, it holds shares in 33 companies including Cloudflare, Trend Micro and CrowdStrike. This wide scope can substantially lessen the impact of localised problems on shareholders’ returns.

I think this fund has significant growth potential as the number of online threats grow. It’s delivered an average annual return of 14% since March 2020.

Shares in Lloyds Banking Group (LSE:LLOY) currently come with a 4.5% dividend yield. But the big issue for investors is whether or not that’s going to grow. 

I think there’s a compelling argument to be made for the claim that it needs to. And with the stock up almost 30% since the start of the year, I think investors should be careful.

Dividend yield

A 4.5% dividend yield isn’t bad. Even if Lloyds just maintains its shareholder distribution from there, I think it’s going to be more than enough to outpace inflation over time.

The trouble is, a 10-year UK government bond currently comes with a yield of 4.7%. That means income investors can likely get a better return over the next decade with less risk. 

From a dividend perspective then, Lloyds shares only make sense over the next 10 years if the bank is going to return more cash than it does right now. But there’s reason for optimism.

Analysts are anticipating that Lloyds will increase its dividend quite significantly by 2027. A summary of their expectations is below:

Year	Dividend per share	Year-on-year growth (%)	Yield at 70.58p share price
2024	3.17p	–	4.52%
2025	3.43p	8.2%	4.9%
2026	4.07p	18.7%	5.8%
2027	4.67p	14.7%	6.7%

If things go according to these estimates, then income investors could do very well with Lloyds shares over the next 10 years. They’re set to return more than the 10-year bond from this year on.

When it comes to share investing though, returns aren’t guaranteed. And this is especially true of dividends and even more so when it comes to banks. 

Pass the salt

It’s not that I’m bearish on Lloyds as a stock. I’m not and I like the bank’s competitive position very much. But I think investors need to be wary when it comes to future dividends.

The banking sector as a whole can be very cyclical and this can weigh on dividends. But there are also specific reasons to be wary about Lloyds shares in particular. 

For over a year, the bank has been at the centre of an investigation into the misselling of car loans. This is set to be heard in the Supreme Court in April and it could go one of two ways. 

According to some analysts, Lloyds might well find itself in the clear. Others, however, are suggesting this could be the most significant issue for the industry since the PPI scandal.

I don’t have a view on which way the case will go. But with the stock up almost 30% since the start of 2025, I think the share price is starting to reflect expectations of a positive outcome.

In any event, the possibility of significant liabilities coming from the case can’t be ignored. And that means investors should take analyst predictions with a bigger pinch of salt than usual.

Wait and see?

One way or another, the Supreme Court hearing looks set to be extremely significant for Lloyds. But the uncertainty is a risk that I find hard to ignore. 

I think there are some really good opportunities in the UK stock market at the moment. Given this, I don’t see the need to take a chance on something that’s hard to predict.

Buying quality FTSE 100 shares can deliver a brilliant blend of capital gains and dividend income over the long term. With this in mind, here are a couple of my favourite blue-chip shares to consider today.

BAE Systems

Defence stocks like BAE Systems (LSE:BA.) are typically considered classic defensive investments rather than exciting growth shares. The long record of dividend growth at this particular weapons builder (dating back to 2011) illustrates the predictability of its earnings from year to year.

But the entire defence sector’s profits outlook has been transformed since Russia invaded Ukraine three years ago. BAE’s order backlog rose £8bn in 2024 to end the year at record highs of £77.8bn. This means City analysts expect earnings here to keep growing strongly.

Analysts tip bottom-line rises of 12% and 11% for 2025 and 2026, respectively.

Against this backcloth, dividends are perhaps unsurprisingly tipped to keep growing as well. So the dividend yields on BAE Systems shares are a solid-if-unspectacular 2.2% for this year and 2.4% for 2026.

With Europe embarking on substantial rearming not seen for decades, major weapons contractors like this have a terrific opportunity to supercharge earnings. BAE is a major supplier to continental armed forces, especially the UK, which accounts for 26% of annual revenues.

Be mindful, however, that the company also makes more than four-tenths (44%) of turnover from the US. This also therefore leaves it vulnerable to falling defence spending Stateside under President Trump’s drive to improve efficiency.

Today the BAE Systems share price commands a higher-than-normal price-to-earnings (P/E) ratio of 22.3 times. I’m confident it can continue to climb in value, though remember that that premium rating could prove the share price’s undoing if group revenues appear under threat.

Sage

Tech shares rarely earn a reputation as lucrative dividend stocks. These companies typically reinvest any excess capital for growth rather than distributing it to shareholders.

But Sage (LSE:SGE) — which makes software for accounting, payroll, and HR functions — has proved a decent passive income share to buy down the years. Thanks to excellent cash generation, dividends here have grown every year since 2012.

City analysts expect this strong record of continue over the near term at least, too. So Sage shares throw up dividend yields of 1.9% and 2% for the financial years to September 2025 and 2026, respectively.

Forecast earnings growth of 13% and 14% for these years supports these predictions

Be aware, however, that — like that of BAE Systems — Sage’s share price trades on an elevated P/E ratio, at 27.8 times. While meaty valuations are typical for high-growth tech shares, this might still leave the company vulnerable to a price correction if news flow worsens, for instance if cooling economic growth dampens business spending.

Yet I’d expect Sage’s shares (which are up 114% over the past five years) to rebound from any weakness over the long term. Ongoing corporate digitalisation should mean demand for its products jumps from current levels. I also like the early successes the company’s having in the fast-growing field of artificial intelligence (AI).

Standard Chartered (LSE:STAN) is, in my opinion, one of the most compelling investment opportunities on the FTSE 100. Despite an 81% surge in its share price over the past 12 months, the bank remains undervalued compared to its global peers — admittedly many of them have surged too — while offering something a little different to its UK-based peers.

The value proposition

Standard Chartered’s forward price-to-earnings (P/E) ratio of 9.1 times represents a significant discount to its global financial peers, signalling potential for price appreciation. This is particularly appealing given the bank’s projected annual earnings growth in the high teens over the next three years. As such, we have a P/E-to-growth (PEG) ratio below far below one — around 0.5 — which is typically a sign of an undervalued stock.

Moreover, the bank’s price-to-book (P/B) ratio of 0.79 further underscores its undervaluation, trading at a 40% discount to the sector average. For context, JPMorgan, one of the most expensive banking stocks, trades at a P/B ratio of 2.1, highlighting the disparity in valuations.

Performance is top draw

Standard Chartered’s 2024 results were strong. Operating income reached a record $19.7bn and profit before tax jumped 20% to $6.8bn. The bank’s return on tangible equity (RoTE) improved to 11.7%, with expectations to approach 13% by 2026. Its net interest income rose 10% to $10.4bn, driven by its diversified geographic exposure, particularly in markets where interest rates remain stable.

The Wealth Solutions division was a standout performer, with income growth of 29% and net new money increasing by $44bn. This, coupled with strong results in Global Markets and Global Banking, positions the bank for sustained growth.

What’s more, Standard Chartered committed to a $1.5bn share buyback and a 37% increase in its full-year dividend to 37 cents per share. The bank has set a target to return at least $8bn to shareholders cumulatively from 2024 to 2026, further enhancing its appeal.

CEO’s confidence isn’t matched by analysts

CEO Bill Winters has consistently emphasised his belief in the bank’s undervaluation, particularly its trading below book value despite strong returns. And, it’s true. The bank is much cheaper than its peers. This can arguably be attributed to perceived risks such as geopolitical uncertainties, exposure to volatile emerging markets, and potential pressure on net interest margins as global interest rates fluctuate. Additionally, concerns over its retail banking scale-down and reliance on fee-based income could weigh on investor sentiment. 

And this contributes to a mix bag from analysts. There are currently five Buy ratings, two Outperform, seven Hold ratings, and two Underperforms. This broadly suggests that analysts are confident in the stock, but the current consensus share price target is just 4% higher than the share price.

The bottom line

For me, Standard Chartered is among the most exciting stocks on the index because it’s a financial institution leveraging the growth of developing economies. However, it’s not one I’ve made yet. It’s certainly one I’m considering buying, and in all honesty, it’s one I should have made in January when I first became interested. Sometimes, if you watch a stock for too long, you miss opportunities.

The London Stock Exchange is a prime spot for investors seeking robust passive income streams. The FTSE 100 and FTSE 250 alone offer numerous high-yield opportunities and companies with strong track records of steady dividend growth.

Here’s how the dividend yields of the UK’s large- and mid-cap share indexes stack up against those on major overseas indexes:

Share index	Forward dividend yield
FTSE 100 (UK)	3.6%
FTSE 250 (UK)	3.5%
S&P 500 (US)	1.3%
Dow Jones Industrial Average (US)	1.9%
DAX (Germany)	1.8%
CAC 40 (France)	2.7%
Nikkei 225 (Japan)	1.9%

These numbers are impressive. But successful passive income investing is about more than choosing the biggest-paying shares. Finding reliable dividend growers is as important as digging out shares with above-average dividend yields.

Not only does a growing cash reward helps individuals to offset the problem of inflation. Focusing blindly on yield can leave investors exposed to companies with weak balance sheets and/or potential earnings problems. These are classic dividend traps that individuals should try to avoid.

Two dividend shares

With this in mind, here are two great dividend growth shares to consider today.

TBC Bank

Low market penetration and robust economic conditions are giving TBC Bank (LSE:TBCG) the sort of earnings growth that UK banks like Lloyds can only dream of. This in turn has lit a fire under dividends.

TBC is one of the largest financial services providers in Eurasia. It has sprawling operations in Georgia and Uzbekistan, two countries experiencing strong economic growth and a subsequent jump in consumer demand.

To give you a flavour, the bank saw its loan book rise 14.2% in its core Georgian operation over the course of 2024.

City analysts think TBC’s earnings will dip in 2025. But a robust long-term outlook, combined with the bank’s well capitalised balance sheet, mean dividends are tipped to keep rising regardless.

Its CET1 capital ratio, a measure of solvency, was 16.8% as of December, well above regulatory requirements.

Predictions of further dividend growth this year mean the yield on TBC shares is a healthy 6.2%. Be aware, however, that competition from regional giant Lion Finance remains a significant threat to future returns.

City of London Investment Trust

Shares-based trusts like the City of London Investment Trust (LSE:CTY) can fall during stock market slumps. But their diversified approach means that, over a long time horizon, they can be a great way to balance risk and make a decent return.

This particular trust has been an especially lucrative one for dividend investors. This is because annual payouts here have grown for 58 straight years, the best record of any UK-listed investment trust.

Analysts expect this proud record to continue, too, despite the threat of resurgent inflation and trade tariffs. I’m not surprised by this bullish view, either, given the trust’s reslience to other adverse events (including wars, pandemics, banking collapses, and sovereign debt crises).

This means City of London carries a strong 4.8% dividend yield for 2025.

With around 80 companies in its portfolio — and a commitment to have 60% or more invested in large-cap companies — this trust offers an attractive blend of stability and growth potential. I think low-risk investors who are targeting a passive income should take a closer look.

It’s been five years since the FTSE 100 crashed near the start of the pandemic. While some strugglers have been relegated to the FTSE 250 since March 2020, many Footsie stocks have rebounded strongly.

Indeed, according to data from Hargreaves Lansdown, 37 of the current members have since doubled their share prices. And that’s not even including dividends!

Here are the five top-performing blue-chip shares in ascending order (excluding dividends).

In fifth spot is Games Workshop (LSE: GAW), which was promoted to the FTSE 100 at the end of last year. Shares of the tabletop wargame maker are up by a mouth-watering 263% in five years.

With everyone stuck at home, the pandemic proved to be a boon for the firm. Many people discovered or re-engaged with the fictional universe of Warhammer, boosting sales and profits.

The company has kept many of those customers and added new ones too. Revenue has climbed from £270m in its 2019/2020 financial year to an expected £586m for this one (ending May).

Net profit has surged by around 150% over this time, supporting a big rise in the dividend. Quite simply, the company has performed wonderfully and shareholders (myself included) have been handsomely rewarded.

Nowadays, over 75% of its revenue comes from abroad. While that’s a positive thing, it does present currency risk due to the expanding international footprint. That is, fluctuations in exchange rates can reduce as well as boost reported profits.

Looking ahead though, I expect the business to keep growing as it exploits its rich repository of intellectual property, including turning Warhammer into films and TV shows in partnership with Amazon. Growth in Asia is also very strong.

Games Workshop shares aren’t cheap at 27 times earnings. But I expect to still be holding mine in five years’ time.

More top stocks

In fourth place is NatWest Group, whose shares are up 273%. Like other lenders, NatWest has benefitted from higher interest rates and improved net interest margins (the difference between what the bank earns on loans and pays on deposits).

Additionally, the British Government has been gradually selling down its stake, while rising dividends and share buybacks have boosted investor sentiment. But even after the stock’s surge, NatWest’s forward dividend yield is close to 6%.

Third is Airtel Africa. This isn’t one I follow closely, but it should have been. Shares of the telecoms firm are up by a very impressive 311%.

Taking second spot is private equity firm 3i Group, which is up by a stonking 456%. This has been driven by its largest holding Action, the discount retailer that has spread like wildfire across Europe.

And the crown goes to…

Since the Covid crash five years ago, the standout winner has been…drum roll, please…Rolls-Royce.

Shares of the engine maker are up by a surreal 549%.

Rolls’ successful turnaround has been driven by cost-cutting measures and renegotiated contracts, as well as the post-Covid recovery in air travel and rising defence spending. Profits margins are up and debt is down significantly.

The shares trade at a premium 27 times earnings, which doesn’t leave much room for error (slowing growth, for example, or an earnings hiccup). But as a shareholder since mid-2023, I’m more than happy with the returns so far.

Just over a year ago, I ran the rule over GSK (LSE: GSK) shares. They looked very cheap and were offering a growing dividend.

However, I chose instead to invest in FTSE 100 pharmaceutical peer AstraZeneca due to its stronger growth prospects and deeper pipeline of potential blockbusters. I don’t regret that decision, as Astra stock’s up 11% over the past year versus GSK’s 10% decline.

But GSK shares still look cheap and offer a 4% dividend yield. So should I buy some this time? Let’s dig in.

Solid 2024 results

GSK specialises in vaccines and medicines in areas such as HIV, oncology (cancer), respiratory diseases, and immunology. Last year, revenue grew 7% at constant exchange rates to £31.4bn.

Speciality medicines sales rose 19%, while HIV treatments grew 13% and oncology sales surged 98%.

General medicines also grew 6%, supported by a notable 27% increase in Trelegy sales (a once-daily inhaler to treat COPD and asthma). 

Unfortunately, vaccine revenue fell 4%, with a sharp 51% drop in Arexvy sales. Arexvy is GSK’s jab for RSV, a respiratory virus that can be serious for infants and older adults. However, the US has limited it to those aged 75+ and at-risk individuals aged 60-74. 

Despite the top-line growth, reported earnings per share (EPS) dropped 40%, largely due to a £1.8bn charge related to the settlement of Zantac litigation. Excluding this and declining Covid vaccine sales, core EPS jumped 10% to 159.3p.

The good news for GSK shareholders is that 93% of Zantac cases in US states have now been settled. While further lawsuits are pending, it appears the financial damage is nowhere near as bad as first feared.

Naturally, litigation is a key risk for GSK and the wider pharmaceutical industry, as are failed clinical trials. 

Valuation

GSK hiked the dividend 5.2% last year to 61p per share. For 2025, it expects to pay 64p per share, which translates into a forward-looking dividend yield of about 4.3%. Forecasts show the payment very well covered by expected earnings, though of course dividends aren’t guaranteed.

Meanwhile, the stock still looks cheap, trading at just 8.9 times this year’s forecast earnings. That’s significantly less than AstraZeneca (16.8), though its larger peer is growing faster and has better margins.

GSK also announced a £2bn share buyback programme that will be implemented over the next 18 months. So that’s a big positive here, especially while the shares are trading cheaply.

My decision

The drugmaker expects to grow sales 3%-5% this year, with core EPS growth of 6%-8%, including the expected benefit from the share buyback programme.

Looking further ahead, it has increased its 2031 sales outlook to at least £40bn, up from £38bn. According to my calculations, £40bn would represent a compound annual growth rate (CAGR) of about 3.5%.

Admittedly, earnings are set to grow faster, likely supporting a rising dividend. But the long-term revenue growth outlook doesn’t really excite me. 

Moreover, I already have quite a bit of healthcare exposure in my portfolio through AstraZeneca and Novo Nordisk, the maker of Ozempic. With the new US administration signalling a shift in healthcare policies, especially around vaccines (GSK’s strong suit), I’m cautious about adding to the sector.

Therefore, I’m not going to buy GSK shares at £15, despite the apparent value on offer.

Many people start their investing journey by putting money into growth stocks. This is entirely understandable, as shares that grow much quicker than the average obviously have the potential to build significant wealth over time.

Additionally, some growth stocks have famously delivered spectacular returns. AI chip maker Nvidia, for example, has skyrocketed 2,180% over five years and 20,470% across a decade!

Here, I want to consider how large a Stocks and Shares ISA portfolio could be after years of investing £700 a month into growth firms.

What are they?

Growth stocks are simply shares of companies that are growing much faster than the market average or their peers. If a listed business is consistently growing its annual revenue above 25% say, then it would normally be defined as a growth share.

Often, these stocks will be from the technology sector, but not always. Look at engine maker Rolls-Royce, which is now putting up very strong revenue and earnings growth in the double digits. The FTSE 100 blue-chip stock’s up 750% in three years!

Clearly then, growth firms can come in many guises, offering various avenues of growth for an ISA portfolio.

A cautionary tale

However, growth investing is certainly not without risk. Companies than can keep increasing their revenue and/or earnings in the double digits for long periods are rare beasts. As a result, many stocks that appear to be the real deal turn out not to be.

I’ve owned a handful over the years. One that sticks in my memory is Illumina (NASDAQ: ILMN). Shares of this gene-sequencing giant soared for many years, then started slumping as growth tailed off.

The stock’s down 83% since August 2021.

Illumina hasn’t done itself any favours in recent years. For example, it acquired biotech firm Grail in 2021 without securing the necessary regulatory approvals, which resulted in financial penalties, strategic setbacks, and a forced divestiture. Oops. 

Today, the US firm is under new management and is trying to reignite the growth engine. Perhaps it will bounce back.

However, it was recently put on China’s ‘unreliable entity’ list of foreign firms. So it could face fines and restrictions in a long-term growth market that represents 7% of revenue. Not ideal.

Fortunately, I managed to sell my Illumina holding in 2022 before most of the share price damage was done. But it serves as a cautionary tale of what can go wrong and why companies need to be monitored closely.

How much?

The key to minimising such risks is to build a diverse portfolio. Despite disappointments like Illumina, my portfolio has benefitted from growth stocks such as Axon Enterprise, Intuitive Surgical, MercadoLibre, Shopify, and Games Workshop. All have been market-beaters.

There’s no specific rule on the number of stocks to own. But I would say 20-30 holdings is a good target, certainly for new investors.

Through such diversification, I reckon an 11% average return is achievable long term. That’s not guaranteed though, as it’s above the market average. But with sound stock research and consistency, such a return is not beyond the realms of possibility.

With this rate of return, someone investing £700 a month would go on to build a £1m ISA portfolio after 25 years. Starting from scratch, that would be some achievement.

For many, earning a second income is the holy grail of investing. After all, who doesn’t love the idea of making money without having to work for it?

And better yet, by leveraging an ISA, there won’t be any taxes to pay either. But how much money can an investment portfolio unlock?

The answer depends on the return a portfolio’s able to generate and how much capital an investor can put in. But even with a basic index strategy, investing just £500 each month could eventually earn £89,380 each year if the stocks in question are very successful. Here’s how.

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. Invest consistently

To kick off any investing journey, capital is required. The more, the merrier. But contrary to popular belief, even a relatively small sum ranging from £100 to £500 each month can be sufficient to get the ball rolling. The key is consistency.

Let’s say an investor’s putting £500 each month into their ISA. Assuming their portfolio’s yielding a return of around 10% a year in line with the stock market average, after compounding for 30 years, a portfolio would have grown to £1.1m. And following the 4% withdrawal rule that’s enough to generate a £45,200 second income.

Step 2. Buy and hold

Many investors rely on index funds to build their wealth. However, others prefer to take matters into their own hands, picking individual companies to consider investing in.

Stock picking requires a lot more effort and usually comes paired with more risk. But it also paves the way to superior returns that, in the long run, could translate into a significantly larger second income.

Take Diploma (LSE:DPLM), for example. The industrial products distribution enterprise has embedded itself heavily into the increasingly complex supply chains of its customers. As a result, Diploma commands impressive customer loyalty that’s translated into robust growth in both revenue and earnings. So much so, the stock’s delivered an average annualised return of 16.7% over the last decade for shareholders who bought and held on.

At this rate of return, investing £500 a month would even transform an empty ISA into a £2.2m portfolio or an £89,380 second income!

Step 3. Watch and review

As exciting as the prospect of earning £89k tax-free each year is, there are some important caveats to consider. First and foremost is Diploma’s past success doesn’t guarantee future returns.

In recent weeks, the US markets have entered turmoil as investors speculate about the impact of US import tariffs. The brewing trade wars are particularly problematic for Diploma, given its distributing parts and components to customers scattered all over the globe, including the US.

In fact, roughly 42% of sales currently originate from America, resulting in significant exposure that could undermine its profit margins as well as customer demand.

Of course, there are plenty of other businesses to consider beyond Diploma that could be capable of delivering a higher rate of return than the stock market’s 10% average.

However, in each case, investors need to carefully monitor and detect any looming threats to stay informed and avoid falling into traps on their journey to earn a large second income.