The Lloyds (LSE:LLOY) share price has leaped into 2025, with the stock’s 26% gains outpacing the FTSE 100’s 4% rise. However, it has not been a smooth few months for the bank. So, why has it surged?

What’s going on?

In February, Lloyds nearly tripled its provision for the car finance mis-selling scandal to £1.2bn. This move significantly impacted its annual profits, which fell from £7.5bn in 2023 to £5.97bn. The scandal stems from discretionary commission arrangements (DCAs), where car dealers were incentivised to inflate interest rates without informing customers. This practice, banned in 2021, is now under scrutiny by the Financial Conduct Authority (FCA), with potential compensation claims dating back to 2007.

The Supreme Court’s upcoming ruling in April could further escalate the issue. If the Supreme Court upholds the October 2023 Court of Appeal decision, which expanded the scope for compensation claims, Lloyds and other lenders could face billions in liabilities. Analysts estimate the total industry-wide cost could reach £30bn–£44bn. This echoes the infamous payment protection insurance (PPI) scandal, which cost Lloyds £21.9bn alone. The Court has rejected the Chancellor’s attempt to keep compensation payments to a minimum.

Despite these challenges, Lloyds has maintained investor confidence through a £1.7bn share buyback program and a £1.28bn dividend payout. CEO Charlie Nunn has emphasised the bank’s strong core performance, highlighting growth in other business areas. These factors, coupled with the fact that Lloyds hadn’t experienced the same appreciation as its peers, is part of the reason the bank stock has pushed higher.

The macroeconomic case is improving

Personally, I think Lloyds is trading closer to where it should be, regardless of the motor finance case. That’s because the macroeconomic case for Lloyds is improving as recession fears subside and the UK economy shows signs of stabilising.

Economic growth, though modest, is supported by higher government spending and wage growth. Falling interest rates are expected to boost mortgage demand. The UK mortgage lending market is forecast to grow by 3.1% in 2025, up from 1.5% in 2024. This trend should benefit Lloyds, given its strong position in the UK housing market.

Additionally, Lloyds’ strategic hedging strategy continues to provide stability. In 2024, Lloyds’ sterling structural hedge delivered £4.2bn in total income, a significant rise from £3.4bn in 2023. This should rise further in 2025. Despite this, the net interest margin (NIM) slightly dipped to 2.95% from 3.11% in 2023, as the bank navigated challenges such as deposit churn and asset margin compression.

However, the NIM would have dropped much further if it wasn’t for the hedging. And what we’re seeing is something of a Goldilocks scenario. Loan demand is rising, net interest income remains elevated, and the economy isn’t providing any unwanted worries.

Personally, having already build a sizeable position in Lloyds, I’m not buying more right now. Risks are currently elevated, but I believe it could still be undervalued, potentially significantly.

Retirement can seem a long way off for many people. A financially savvy worker can turn that long-term timeframe to their advantage and start investing sooner rather than later to help fund their retirement.

For example, if a 40-year-old started today by investing £100 each week in carefully chosen blue-chip shares, I reckon they could grow their wealth and potentially retire early.

Regular saving can help build a sizeable retirement fund

Of course, starting at 30 would be even better than starting at 40 – and at 20 would be even better than at 30!

Unfortunately, though, many of us do not realise that (or have other spending priorities) until it is too late. Even at 40, fortunately, an investor could still make a big difference to their retirement fund if they start investing immediately.

Putting £100 per week into a Stocks and Shares ISA or SIPP and compounding it at 10% annually, after 25 years the investor will have a retirement fund of close to £535k.

That could help them draw an income (for example, via dividends) and retire earlier than otherwise.

Building a quality portfolio of great shares

A goal of 10% might not sound too challenging. After all, FTSE 100 insurer Phoenix Group (LSE: PHNX) currently offers a dividend yield of 10.2% and has been a consistent dividend raiser in recent years. Some other blue-chip shares also offer high yields.

But there are several things to bear in mind. That compound annual growth rate includes good years as well as bad. It also includes capital gain (or loss), as well as dividends.

Phoenix has a generous dividend yield, but its share price has fallen 11% in the past five years.

On top of that, it is always important to diversify across different shares in case one of them disappoints. Over the decades between age 40 and retirement, that is much more likely to happen than it may seem to an investor when they first start investing!

But with the right approach and investing mindset, I think a 10% compound annual growth rate could be achievable.

One share to consider

In fact, I do still think Phoenix is a share to consider for its long-term potential.

The insurance market is vast and is unlikely to get much smaller any time soon, I reckon. With around 12m customers and close to £300bn, Phoenix has a huge business that has proven able to generate large amounts of spare cash. That is helpful when it comes to funding those chunky dividends.

There are risks with all shares, including Phoenix. For example, it has a book of mortgages that include certain valuation assumptions. If a property market slump saw prices fall far enough, those assumptions could turn out to be inadequate, meaning Phoenix may need to revalue the book, hurting profits.

From a long-term perspective, though, I think the proven business continues to have strong potential.

Investors often think of the blue-chip FTSE 100 index of leading shares as staid, if not dull.

But over the past five years, the index has moved up by 60%.

That is pretty racy growth for a collection of businesses some of which – like Legal & General – were in operation before Queen Victoria ascended to the throne.

What is going on?

Mature markets are not always calm

If you cast your mind back to where you were and what you were doing five years ago, then things may become more obvious.

That March, markets had crashed as the global pandemic took hold. So looking at the past five years flatters the long-term performance of the FTSE 100 due to an abnormally low baseline.

If we extended the timeframe just a couple of months longer, to January 2020, the growth would have been only 13% until now. That is still growth – but a long way short of 60%!

Still, I think there is a valuable lesson here from which an investor can possibly profit. Even a staid-seeming index of mature businesses can see its price swing wildly within a fairly small timeframe.

Buying when the market is racked with doubt

It takes a brave investor to wade into markets when hordes of people are selling.

Sometimes, a crash can be overdone. But for some shares, a price crash is highly rational, as the market is assessing the possible future impact on its business of whatever has precipitated a sudden market downturn.

Take Saga as an example. Its share price began 2020 at over £7. As the market realised that pandemic-inspired travel restrictions could be catastrophic for a company selling cruises to pensioners, the share fell closer to £2 in March 2020. Today, though, it is even lower.

So, buying in a market crash can be like trying to catch a falling knife. No matter how low a share price (any share price) goes, it can always go lower.

But moments of market frenzy can also throw up great bargains.

18%+ yield from a FTSE share

Today, FTSE 100 asset manager M&G (LSE: MNG) has a yield of 9.2%. That is very appealing to me — among the highest in the index.

Just under five years ago, though, the M&G share price had collapsed to around 51% of its current level. Not only does that mean that someone investing then would now almost have doubled their money (on paper), but they would also be earning an annual dividend yield of over 18%.

For a blue-chip FTSE firm that has a policy of maintaining or raising its dividend per share annually, an 18% yield is amazing.

Of course, dividends are never guaranteed and we will find out this Wednesday (19 March), when M&G releases its 2024 results, whether the dividend has grown further.

Just as in 2020, there are risks for the asset manager. In the first half, clients withdrew more funds from the core business than they put in. If that continues, it could hurt profits.

Still, for a proven business with millions of customers, M&G’s share price five years ago looks like a bargain today!

Yes, that is the benefit of hindsight.

But it also explains why I am making a list of FTSE shares now I would like to snap up if another market crash sends them sinking!

Stocks and Shares ISAs are superb vehicles for passive income investing. With a £20,000 yearly contribution limit and no taxes due on dividends, savvy investors can buy shares in an ISA to shield their portfolios from HMRC.

Whether the ultimate goal is early retirement or greater financial flexibility, here’s one way investors could aim for £2,500 in monthly passive income.

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.

Income investing

Buying dividend stocks isn’t a guaranteed method to make money. Company share prices frequently fall and sometimes stay depressed for many years. Additionally, dividend payments aren’t assured, so they’re not a sure-fire passive income source.

However, there’s also potential for big rewards. Thanks to compound returns, portfolio gains can add up considerably over the long run, especially in a tax-free ISA.

For instance, if the average dividend yield across an investor’s holdings is 5%, they’d need £600,000 invested to secure £30,000 in annual passive income.

Assuming their portfolio grew 10% per year, this could be accomplished in under 18 years by investing £1,000 a month. Someone starting at 32 could feasibly be earning £2,500 in monthly passive income by their 50th birthday. Encouraging stuff!

To achieve a 5% yield, it’s worth diversifying across a few dozen stocks to mitigate the impact of possible dividend cuts or suspensions. Let’s examine two that deserve consideration.

Halma

First, investors could consider taking refuge in Halma (LSE:HLMA) shares. This FTSE 100-listed safety equipment specialist has a stunning dividend history. For 45 consecutive years, payouts have increased by at least 5%.

Halma’s business isn’t sexy, but that has advantages. It produces fire detection systems, medical devices, safety locks, water treatment solutions, and much more. Since many of Halma’s products are mandated by law, the group benefits from non-discretionary demand, making it resilient to economic downturns.

However, the valuation’s a potential concern. Trading at a forward price-to-earnings (P/E) ratio above 27, this stock isn’t cheap. Disappointing results could send the share price tumbling.

Thankfully, that hasn’t materialised recently. Halma’s turned record profits every year for over two decades. Upgraded FY25 guidance for profit margins “modestly above” 21% suggests the conglomerate will continue in that vein for the near future.

Despite consistent dividend growth, the yield’s just 0.8%. Consequently, higher-yield shares would be needed to complement a position in Halma.

ITV

One that might fit the bill is FTSE 250 media company ITV (LSE:ITV), which yields an attractive 6.6%.

Although the broadcasting firm’s total revenue for FY24 dipped 3% to £4.1bn, pre-tax profits surged from £193m to £521m. Record profits for its production arm, ITV studios, and higher digital advertising revenues underpinned this bottom-line improvement.

ITV has been shifting its focus from traditional television advertising to the digital streaming market dominated by platforms like Netflix. It’s encouraging to see efforts in this space bearing fruit.

Furthermore, takeover rumours linked to multiple potential bidders have boosted share price growth in recent months. Should an acquisition happen, this could be a boon for shareholders.

As a note of caution, dividend cover of 1.8 times expected earnings is below the two times safety threshold, indicating it might be unsustainable. Therefore, investors would be wise to avoid an overreliance on ITV shares for passive income, but they’re worth considering as part of a diversified portfolio.

Building a passive income from a portfolio of FTSE 100 shares is a brilliant way to supplement the State Pension on retirement, in my view.

With the end of the tax year looming (5 April), now’s the perfect time to get stuck in, by maximising this year’s Stocks and Shares ISA allowance. 

This flexible and tax-efficient account can be a brilliant way to generate a tax-free second income, particularly for those looking to build a second income stream.

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.

FTSE 100 shares offer dividends and growth

Investing in a balanced portfolio of FTSE 100 shares could be the key to hitting that goal. By carefully selecting stocks that balance risk, growth, and income, investors can benefit from steady dividend payments and capital appreciation. 

Companies with strong business models, loyal customers, and steadily rising revenues tend to make reliable long-term investments.

One such stock to consider is Admiral Group (LSE: ADM). The motor insurer has bounced back from a tough time, with its share price rising 13% in the past 12 months, and 56% over two years. Full-year results, published on 6 March, highlighted this impressive growth.

Pre-tax profit jumped 90% to £839.2m, driven by strength in its UK motor business. Group turnover climbed 28% to £6.15bn. The board also reported a 14% increase in customer numbers, reaching 11.1m.

Admiral’s faced some difficult years, as claims-cost inflation hit the insurance industry, squeezing margins. It’s a highly competitive sector, as customers relentlessly search for cheaper premiums on comparison sites. During the cost-of-living crisis, they’ve doubled down on that.

However, Admiral’s rebound highlights its underlying strength. Investors will also be drawn to its attractive 6.1% trailing dividend yield, although it’s important to remember that dividends are never guaranteed. 

Despite its recent share price rise, Admiral still looks fairly valued, with a price-to-earnings ratio of 13.8.

Buy dividend stocks and stick with them

Generating a monthly passive income of £1,000 (£12,000 a year) in retirement requires a carefully-built investment portfolio, containing at least a dozen stocks from different sectors and with different risk profiles.

Assuming an average dividend yield of 6% a year, an investor would need a total portfolio of around £200,000 to reach that income target.

Building this sum from scratch over 20 years is achievable with disciplined investing. If a 45-year-old investor starts now and their portfolio delivers an average 7% annual return, broadly in line with the long-term FTSE 100 average, they’d need to invest £385 a month to hit the £200k target by age 65.

By selecting high-quality stocks that slightly outperform the market and achieve an average return of 9% a year, they could hit the same target by investing just £300 a month.

These figures show that even at 45, it’s not too late to start saving seriously. The key is to invest as much as possible, as early as possible, and to stay the course through market ups and downs.

Investing consistently in solid FTSE 100 dividend stocks could make all the difference come retirement.

The new 2025-26 ISA year is just a few weeks away. And with it comes a whole new ISA allowance that we can use for long-term, tax-free investment. The current limit is £20,000 a year for an adult ISA, and £9,000 for a junior ISA. So how should we prepare ourselves?

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.

Dream a little

It makes sense to pay down any non-mortgage debt and set aside an emergency cash reserve before putting money in a Stocks and Shares ISA. After that, I think it can give us a big motivational boost to work out just how much we might be able to build.

I’ve done exactly that using Aviva (LSE: AV.) as an example. It’s one of my own ISA picks, and current forecasts put the dividend at 6.6%. That’s close to long-term average FTSE 100 returns of 6.9% a year, so it seems like a fairly representative choice.

A full £20,000 split monthly and invested in Aviva stock every year could grow to more than £810,000 in 20 years. That’s more than double the total invested, and it’s only from reinvested dividends. Any share price rises would be on top of that, and it would only take 2% a year to push the total to over a million.

Now, the Aviva dividend’s not guaranteed, and I see a fair chance the long-term average will be lower. It was slashed for 2019, for example. But I think it’s a good candidate for how long-term FTSE 100 gains could turn out.

And I definitely wouldn’t put all my ISA money in one stock, especially not with an insurance company like Aviva. It faces short-term risks and typically more volatility than the market average. And after a good couple of years, I think Aviva might be fully valued now. And that takes me to the next thing…

Check the ISA winners

The share price chart above shows a couple of interesting things. Aviva shares are up around 50% in the past five years. But they’ve fallen since 2022, with lots of short-term ups and downs.

The stock market works best for long-term investors, but diversification‘s at least equally important. And a look today at what the UK’s most successful ISA investors do with their money shows one way we can achieve it quickly.

Millionaire ISA investors typically have more of their money in funds and investment trusts than average. By picking an appropriate one we can invest our cash across, say, a wide range of dividend-paying FTSE 100 stocks and spread the risk.

Work out a strategy

I believe a new Stocks and Shares ISA investor should seriously consider putting their first couple of years’ cash into investment trusts. As well as diversification, they can help us learn about a number of different strategies… income, growth, small-caps, developing markets etc.

And spending a bit of early time investigating these can provide an extra boost. It can help us develop the strategy that suits us best for moving on to individual stock buys. And we can even start thinking about it now, before we plonk down our first penny.

How much do investors need in equities to earn £1,000 a month in passive income? At first sight, the answer might be as low as £150,000. 

Earning £1,000 a month from a £150,000 portfolio requires an average dividend yield of 8%. And there are plenty of UK stocks to consider offering that level of return right now.

B&M European Value Retail

One example is B&M European Value Retail (LSE:BME). The stock has an 11% yield (including an annual special dividend), but there are reasons to be concerned about the business at the moment.

For a number of reasons, like-for-like sales have been declining. While the company can look to offset this in the short term by opening more stores, it won’t be able to do this indefinitely. 

This means investors should consider whether the current dividend is likely to be sustainable over the long term. And it’s probably worth noting this year’s special dividend was lower than the previous one.

Nonetheless, UK retailers generally have been going through a tough period. And it might be the case that B&M’s going to thrive when things recover, which could make the stock a bargain to think about right now.

Legal & General

Legal & General‘s (LSE:LGEN) an entirely different type of business. But the stock comes with a dividend yield of 8.8% and the company has actually been doing quite well.

In its most recent update, the firm announced an increased dividend and a £500m share buyback. That’s encouraging stuff, but investors should note there are genuine risks to consider. 

The nature of life insurance contracts and pension risk transfers makes the stock inherently risky. The possibility of a large and unexpected liability is almost impossible to rule out.  I think this uncertainty is why Legal & General shares trade with such a big dividend yield. But passive income investors might want to consider it as a potential portfolio stock. 

Taylor Wimpey

A third stock with a dividend yield above 8% is Taylor Wimpey (LSE:TW.). It’s fair to say the UK housebuilder has had a difficult time with rising inflation and high interest rates.

This has been an issue across the industry and the stock now comes with a dividend yield of 8.4% as a result. And the company’s actually more resilient than most when it comes to shareholder returns.

Taylor Wimpey has a policy of distributing cash based on its asset base, rather than its cash flows. That means it tends to maintain its dividend even during cyclical downturns. 

In my view, the biggest risk with the stock is an ongoing investigation from the Competition & Markets Authority. But investors should weigh this against a big potential reward on offer. 

Diversification

I think an investor absolutely can build a portfolio that generates 8% a year in dividends. And that’s enough to turn £150,000 in cash into £1,000 a year in passive income. 

A high dividend yield however, can be a sign that a stock’s risky – even more so than shares are generally. But one way of trying to limit this is by building a diversified portfolio.

Fortunately for investors, the UK has some high-yielding stocks in various different industries. That doesn’t eliminate the risk entirely, but it should hopefully limit it somewhat.

The need to earn a second income is rising. With inflation sending the cost of living through the roof in recent years, having a second flow of money pouring into a bank account each month can make a world of difference.

And by making some smart investment decisions, it’s possible to achieve a pretty chunky additional income almost entirely passively. So with that in mind, let’s explore how an investor can aim to earn an extra £50k each year from the stock market.

Earning by investing

Looking at the FTSE 100, UK shares have historically delivered a 4% return from dividends, with a further 4% from capital gains, or 8% in total. While building a portfolio, dividends can be reinvested to accelerate the wealth-building process. But eventually, investors can choose to keep this money to create a passive second income stream.

If the goal is to earn an extra £50k a year, a 4% dividend yield’s going to require a portfolio worth £1.25m! That’s obviously not pocket change. But reaching this level of wealth isn’t as impossible as it might seem.

By being more selective and picking individual businesses, it’s possible to seek higher returns as well as higher dividend yields. In fact, even after delivering solid gains in 2024, there are plenty of under-appreciated British stocks offering ample growth and income potential.

As such, building a 5%-yielding portfolio in 2025 without taking on enormous risk isn’t too challenging. And it also shifts the goalposts to unlocking a £50k second income from £1.25m to £1m. And if the portfolio’s able to generate a 10% total return, investing just £500 each month at this rate would reach this target in just shy of 30 years.

Opportunities in 2025

Earning market-beating returns is simple enough on paper. But in practice, it can get quite tricky. And if an investor makes the wrong decisions, a portfolio can backfire, destroying wealth instead of creating it.

With that in mind, let’s take a look at a popular income pick among British investors, British American Tobacco (LSE:BATS). Some investors may have some understandable ESG-related concerns about investing in this enterprise. However, the tobacco titan currently offers an impressive 7.5% yield, even after rising more than 35% over the last 12 months.

Having customers hooked on a product paves the way for impressive pricing power. As such, falling tobacco volumes have been offset through price hikes, enabling the company to continue raising dividends for decades. And even in the last five years, British American Tobacco’s returned £28bn to shareholders either through dividends or buybacks.

The firm certainly sounds like a promising investment candidate. But like every business, it has its weak spots. Price hikes can only grow the revenue stream so much. And as smoking becomes increasingly expensive, paired with greater health concerns, tobacco volumes are expected to steadily shrink almost every year.

Management’s fully aware of this threat and has been aggressively investing in alternative smokeless products such as vapes. These now represent 17.5% of the group’s revenue stream, but with growth seemingly slowing, likely due to tough competition, British American Tobacco’s impressive dividend track record may be coming to an end.

Personally, I think investors need to consider looking elsewhere for market-beating, income-generating opportunities.

The best time to buy shares in any company is when they’re out of favour with investors. And this has been the case with InterContinental Hotels Group (LSE:IHG). 

The stock’s down 22% over the last month, but it’s outperformed the FTSE 100 over the decade. So could this be my opportunity to buy a stock I’ve had my eye on for some time?

Cash generation

The thing I like most about InterContinental Hotels Group is that it has a business model that delivers huge cash generation. And at the end of the day, that’s what investing’s all about. 

Over the last 10 years, the company’s reinvested just 5% of the cash it has generated through its operations back into its business. The rest has been made available for shareholder returns.

Importantly however, this hasn’t come at the expense of growth. Revenues have grown at an average of 12.5% a year during this period, which includes the heavily-disrupting Covid-19 pandemic.

A business that can grow while returning almost all of the cash it generates to shareholders has to be worth a closer look. And InterContinental’s success over the last 10 years hasn’t been an accident. 

Business model

The key to the company’s success has been its asset-light business model. In other words, it doesn’t actually own the hotels in its network. Instead, it enters into franchise agreements with individual operators. In exchange for a percentage of revenues, the hotels benefit from its marketing, booking management system, and expertise.

As a result, InterContinental doesn’t pick up any of the costs associated with running hotels. Things like maintaining buildings, paying staff, and buying supplies are all handled by individual operators.

That means there isn’t much for the company to spend its cash on internally. And with the cost of adding a hotel to its network negligible, most of its earnings become available to shareholders.

Why is the stock down?

All of this sounds great, but it means the obvious question is why the stock’s down? If the business is a cash machine, why have investors been going off it over the last few months?

The company’s latest update was generally strong, but there was one important negative point that stood out. Higher net debt has been leading to an increase in interest costs, cutting into profits. 

This is partly the result of IHG using its cash for share buybacks, instead of boosting its balance sheet. As such, the decision to spend a further $900m on shares repurchases has to be considered a risk.

I’d rather see the cash used for debt reduction, but that’s a minor objection to what is otherwise a terrific company. Hotels might not look exciting, but I think this is an unusually good business.

Time to seize the moment?

When shares in a quality company fall 22%, I think investors should pay attention. But a stock isn’t automatically cheap just because its share price is lower than it once was. 

The stock still trades at a price-to-earnings (P/E) multiple of 28, which is high by most standards. So while I like the business very much, I think there are better opportunities for me elsewhere.