For example, say you want to bring in £750 a month. That’s equivalent to £9,000 a year, which should be withdrawn using the recommended 4% rule. The idea is that by taking out only 4% a year, you don’t rapidly deplete the overall capital.

So for that much income, you’d need a pot of around £225k (£9,000 is 4% of £225k).

Naturally, to build a pot that big takes dedication, patience, and good stock-picking skills. But how does that look in practice?

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.

Building £225k with monthly investing

Let’s say you invest £300 a month into your ISA. Working with a realistic average annual return of 8% a year, the growth could compound as such:

Within 15 years, it could exceed £100,000 and after 20 years, it would be about £171,000. In less than 25 years, you could hit the £225k target.

These are only estimates, not guarantees, but they show how regular contributions plus compounding can snowball into a serious income-producing pot over time.

So how can an investor optimise their chances of achieving those returns? 

Targeting 8%+ returns

To aim for 8% or higher, I’d focus on a diversified basket of solid dividend payers mixed with a few quality growth stocks. A mix across sectors (banks, consumer stocks, healthcare, tech, infrastructure) helps to reduce the risk of concentrated losses in one area.

On the FTSE 100, some examples include HSBC, Legal & General, GSK, and National Grid. But the mid-cap FTSE 250 index shouldn’t be overlooked.

One example of a promising mid-cap income stock is challenger bank OSB Group (LSE: OSB).

A closer look at OSB Group

OSB focuses on specialist lending, such as buy-to-let and residential mortgages. It’s made impressive progress over the past decade, up 87.7% in the past 10 years. With dividends included, the total shareholder returns ramp up to 272% — an annualised return of 14% a year. 

If it continued on that trajectory, it would make an excellent addition to a passive income portoflio.

Its dividend yield is 6.3%, with a payout ratio of 46%, so it’s well covered by earnings and has room to be increased if profits grow.

But with heavy exposure to the UK mortgage market, a weak economy, falling property prices, or higher borrower defaults could hit profits. If the Bank of England cuts rates and borrowers refinance at cheaper deals, it could limit future growth.

Still, management’s delivered continuous, uninterrupted dividends for 12 years, and the bank generates a return on equity (ROE) of roughly 12.6%. That’s a strong sign it’s making solid profits on shareholders’ capital.

The bottom line

For UK investors building ISA income, a stock like OSB is worth considering. The attractive yield plus potential capital growth would speed up the journey to £225k.

But the key is not to bet everything on one name. By combining several resilient dividend payers and growth stocks with a multi-decade outlook, your ISA has a better chance of reaching that goal.

The post How much do I need in an ISA to target £750 a month of passive income? appeared first on The Motley Fool UK.

OSB Group (LSE: OSB) has results due on 5 March. Shareholders in the UK’s big banks might look at Bank of England base rate cuts with trepidation. That’s because they could have a significant impact on their net interest margins and therefore profits.

Strength in agility

OSB is a specialist mortgage lender, and describes itself as “primarily focused on carefully selected sub-segments of the mortgage market such as Buy to Let, Residential, complex commercial and semi-commercial, development finance, bridging and asset finance“.

By being so focused, it can maximise efficiency. It showed in the bank’s first-half results in June, which included a 40.3% cost-to-income ratio. By comparison, Lloyds‘ equivalent was up at 58.6% at the last count.

The smaller and less capital-intense nature of a lender like OSB can also be a weakness. It’s more likely to suffer more during a downturn, as the UK’s challenger banks more recently did.

But there’s an expected 5.6% dividend yield, with analysts predicting progressive annual rises. This could be a good time to consider putting a bit of ISA cash into OSB.

Recovery building steam

The underlying business at ITV (LSE: ITV) looks like it’s getting back on track — though the shares haven’t followed yet. Analysts expect rising earnings and dividends in the next few years. It all starts from 2025 results, also due on 5 March.

In a Q3 trading update in November, ITV told us its “performance for the 9 months to the end of September was better than market expectations“. CEO Carolyn McCall also spoke of “a good performance in a tough advertising market,” telling us “both our businesses are performing well, reflecting the significant transformation we have delivered.”

Looking forward, she said: “We continue to expect to outperform the broadcast advertising market in Q4, and have a strong programme slate for Q4 and into 2026, including the men’s 2026 Football World Cup.“

The advertising market is a fickle one, so there’s always going to be strong competition in that part of ITV’s business. Broadcast content is so often seasonal too. This year there’s the World Cup, but future events coverage is a big unknown.

Still, even with those uncertainties, a 6.2% forecast dividend yield has to make ITV another worth considering for long-term income investors.

Other dates to watch

Investors looking for more dividend shares to consider could do well to keep their eyes open for results from Aberdeen. Due on 2 March, there’s a 6.8% yield on the cards.

Then on 12 March and 16 March respectively, we’ll have the latest from FTSE 100 giants M&G and Phoenix Group Holdings. Forecasts suggest a 6.3% yield from M&G, and 7.1% from Phoenix.

All of these stocks are on my dividend candidates list for 2026.

The post Mark your March diaries with these key dates for red-hot UK dividend shares appeared first on The Motley Fool UK.

Here, nimble challenger banks such as OSB Group (LSE: OSB) and Metro Bank (LSE: MTRO) are plotting a different path forward. While they represent two very different investment theses, both offer compelling reasons to consider them as part of a diversified, income-focused portfolio in 2026.

Why challenger banks?

Here’s the uncomfortable truth for the Big Four: when interest rates fall, their profit factories slow. These heavyweight lenders depend on wide margins — the spread between what they pay savers and what they charge borrowers. Lower rates squeeze those margins, which is why FTSE 100 banks are justifiably nervous about the Bank of England’s expected rate cuts in 2026.

Challenger banks however, operate a different playbook. In most cases, they’ve built lean, technology-driven operations with lower cost bases and strategic niche focus. They don’t compete on the same terms as the Big Four. More importantly, they’ve already navigated the turbulent waters of earlier near-collapses or restructuring, pricing in risk and making it more manageable.

For example, Metro Bank’s 2023 crisis was brutal, with 1,500 job cuts, branch closures, and underperforming loan book sales. It was a painful restructuring but resulted in a lean, focused, and strategically-positioned bank operating high-margin lending segments like corporate, commercial, and SME banking.

Meanwhile, OSB’s maintained steady profitability with a razor-sharp 40% cost-to-income ratio, demonstrating operational discipline even as margins compress.

Two opportunties, two angles

OSB Group’s the immediate income solution here, with a 5.4% dividend yield — far higher than the FTSE 100’s average. The bank raised full-year profit guidance to at least £300m for 2026, signaling management confidence amid economic uncertainty. Wth a price-to-earnings (P/E) ratio of just 4.9, it’s trading at a significant discount to the market, suggesting growth potential if execution continues.

Still, it’s not immune to economic policy changes. In H1 2025, the bank’s earnings declined 20% year-on-year due to lower net interest income. It must meet its guidance targets or risk shaking investor confidence.

Metro Bank’s the more speculative play, but arguably the more exciting one. The bank returned to profitability in 2024 and is targeting double-digit returns in 2026, and mid-to-upper-teens thereafter. Its net interest margin’s expected to expand from 3% to nearly 4% this year, driven by disciplined asset rotation toward higher-yielding corporate and SME lending. If the bank executes this move successfully, it could be the turnaround story of 2026.

But its goals are ambitious and on the background of 2023’s near-collapse, it can’t afford to slip up. Everything hinges on it delivering on estimates, or the next collapse could be permenant.

Final thoughts

While both these challenger banks could face some margin pressure from falling rates, their strategic positioning and operational improvements make them worth considering. In many ways, they have advantages (and buffers) that the Big Four simply can’t compete with.

For retirement-focused investors seeking diversification beyond the big players, FTSE 250 challenger banks offer a compelling alternative to think about. Whether seeking growth opportunities or steady income, the mid-cap index offers a wide variety of options.

The post Why I’m bullish on FTSE 250 challenger banks in 2026 appeared first on The Motley Fool UK.

But there are some shares that play for both sides, delivering dividend income along with impressive capital gains. I’ve identified two that hit the ball out the park in 2025 – International Personal Finance (LSE: IPF) and OSB Group (LSE: OSB).

Combined, they delivered a 94.5% total return when accounting for both growth and dividends. That means a £5,000 investment split equally across both shares when 2025 began would be worth almost £10,000 today!

But what drove their success and can this continue in 2026?

The lesser-known asset manager

International Personal Finance operates home‑credit and digital lending businesses across several international markets, with London‑listed UK shares. The business enjoyed a spectacular year of growth in 2025, despite pressure on household budgets. The share price grew 78.5% and when adding dividends to the mix, it returned a near-100% total.

Despite a 6.4% drop in revenue in H1 2025, earnings jumped 57% as costs and impairments were tightly controlled. Profit margin improved from 5.3% to 8.9%, with earnings per share (EPS) up from 8.8p to 14p in the half.

But if a lower-rate environment transpires, there’s a growing risk of tighter regulation or political scrutiny for the personal finance sector. As a smaller lender, it’s more exposed than larger competitors if the government cracks down on high-cost consumer credit.

For patient investors, International Personal Finance’s combination of low valuation and improving profitability is attractive. However, its exposure to consumer health and regulation is risky, so position sizing and diversification matter when considering it.

The up-and-coming challenger bank

OSB Group’s a specialist lender focused on buy‑to‑let and niche residential and commercial mortgages. Despite a tough backdrop of higher rates and cautious landlords, it delivered what management called a “resilient” performance in 2025: modest loan book growth, strong capital ratios and an increased interim dividend.

The shares grew a moderate 60% but when adding dividends, its total return surged to almost 88%.

In H1 2025, the bank achieved a pre‑tax profit of £192.3m, down year‑on‑year but still generating a solid 13.7% return on tangible equity. It also reported a net interest margin of 2.3%, with retail deposits growing and a successful £578m securitisation improving funding efficiency.

But if interest rates drift lower, things could change. Although a softer rate environment reduces stress on existing borrowers, its margins could suffer if lending rates re‑price down faster than savings. 

For long‑term investors, OSB looks like a promising option to consider right now. It took a hit when rates shot up but is well‑placed to benefit from a controlled descent — barring a slip into a deep recession.

Final thoughts

For investors saving for a home or retirement, it’s important to consider how falling rates can impact a portfolio. Certain UK shares have proved they can cope when rates are high and still stand to benefit if 2026 delivers the anticipated soft landing rather than another shock.

The above two examples reveal how strong businesses can come out of a tough year in good shape – but also how different their risk profiles are once policy starts to shift.

The post £5,000 invested in these 2 UK shares at the start of 2025 is now worth… appeared first on The Motley Fool UK.

So I decided to call in ChatGPT. I’d never allow artificial intelligence (AI) to pick stocks, because it struggles with facts and doesn’t have opinions of its own. But it can throw up a few ideas.

I was hoping for some surprise picks or insights, but it started by naming the two most obvious FTSE 100 income stocks I could imagine.

Legal & General Group

The first one is so obvious, I hold it myself, asset manager and insurer Legal & General Group (LSE: LGEN), which doesn’t coincidentally have the highest trailing yield on the blue-chip index, at 8.2%.

ChatGPT said it offers financial sector exposure with strong income potential, adding: “It benefits from recurring cash flows and its payout is generally well-covered by earnings”.

I’m unconvinced. Ideally, shareholder payouts should be covered twice by earnings. Legal & General’s dividend cover is just 0.94. That’s my biggest worry about this stock, yet ChatGPT showcased it as a key benefit. Worrying.

My second concern is that the Legal & General share price has underperformed, due to three years of volatile earnings. Although this might be an opportunity, giving its scope to play catch-up with sector rivals.

Either way, I think the shares are worth considering, for long-term income seekers. Legal & General has a strong balance sheet, and I believe the dividend should hold. No guarantees though.

British American Tobacco

The next tip was equally predictable, but maybe that’s not a bad thing. ChatGPT named British American Tobacco (LSE: BATS), calling it a globally-recognised tobacco business with a long history of generous dividends. It also noted that “yields have trended well above the FTSE 100 average thanks to consistent cash generation from established brands”.

The British American Tobacco share price is up 36% in a year, the dividend yield’s a thumping 6%, but the price-to-earnings ratio remains a modest 11. The FTSE 100 average is around 20.

AI doesn’t mention any risks so I’ll point out that cigarette makers are under constant regulatory scrutiny, and after a strong recent run, the shares may slow. But it may be worth considering with a long-term view, for those happy to invest in cigarette makers.

OSB Group

I asked ChatGPT to name one stock from the FTSE 250 and it picked OSB Group (LSE: OSB), which offers specialist mortgage and savings products. That surprised me, because it already tipped a stock from the financial services sector. I’m unsure this is the diversification I called for.

Like the big FTSE 100 banks, the OSB share price has had a blinder, soaring 75% in 12 months. Yet it’s still cheap with a price-to-earnings ratio of 7.7, while the trailing dividend yield’s a nifty 5.3%.

Its lending has been growing nicely and while falling base rates could squeeze net interest margins, they could also boost mortgage lending and reduce impairments. OSB has even been running a share buyback programme. This one merits further investigation.

ChatGPT has its uses but as my results show, it must be approached with caution. Investors must make their own decisions rather than rely on a robot.

The post I asked ChatGPT to name 3 brilliant passive income stocks for an ISA in 2026 and it said… appeared first on The Motley Fool UK.

That makes them two of the most attractive mid-cap income stocks on the London Stock Exchange right now.

But past performance is never indicative of future returns and a shifting economic environment could spell trouble in the coming years. So how should existing shareholders prepare, and do they still present an opportunity for new investors?

A recovery gem

OSB Group kicked-off the year heavily undervalued, trading at just 0.7 times tangible book value and 5.3 times forward earnings. As the year progressed, the market repriced mortgage lending risk and reassessed rate-cut implications, leading to a significant boost for the niche mortgage and loan provider.

Now, it’s at a more moderate valuation, with a price-to-book (P/B) ratio of 1.1 and forward price-to-earnings (P/E) ratio of 7.8. This reflects its growth but also indicates potential room for further gains.

To solidify its income credentials, the group boosted dividend 5% year on year to 34p per share and maintains strong coverage, with a payout ratio of 48.4%. Backed by 11 years of uninterrupted payments, and it still looks like a compelling income option to consider in 2026.

However, it’s worth noting that OSB Group’s profits depend heavily on interest rate margins and the buy-to-let mortgage market. Both are under pressure as rates fall and regulations tighten, potentially squeezing earnings and the dividend faster than expected.

Coming back strongly

After a tumultuous few years mired by a rebranding catastrophe, Aberdeen Group has bounced back, once again with its original name. The recovery was largely driven by the explosive growth of its online trading platform, which now boasts almost 500,000 customers and is one of the UK’s leading direct-to-consumer wealth managers.

Its cost-cutting initiatives are ahead of schedule, and management has raised 2026 profit guidance to at least £300m, suggesting renewed confidence. With a P/B ratio of only 0.74, it’s even more undervalued than OSB Group — so 2026 could be its year.

And although it hasn’t raised dividends for several years, the ongoing growth could make that a possibility soon. It has thin but sufficient cash coverage and earnings about 20% higher than dividends per share. Earnings have increased 3.7% year-on-year despite a 7% drop in revenue, revealing strong operational efficiency.

Still, the thin coverage does risk a dividend cut if earnings miss. Plus, the Core Investments division continues to underperform, with only one-third of funds beating benchmarks.

But with an improving outlook paired with a 7.5% yield, it’s a dividend stock worth considering in my book.

Mid-cap promise

Naturally, there are stronger and more well-established dividend shares on the FTSE 100. But what I like about mid-cap’s is their untapped potential. When markets truly recover, the well-positioned tend to fly and the combined dividend and growth returns make them lucrative picks.

As always, any considerations should be made as part of a well-diversified portfolio, including some defensive and growth picks in the mix.

The post Can these 2 incredible FTSE 250 dividend stocks fly even higher in 2026? appeared first on The Motley Fool UK.

Dividend investing is a popular method of earning income from the stock market. It’s particularly effective when done via a Stocks and Shares ISA to reduce tax outgoings.

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.

I’m still a long way off from achieving my goal, but luckily, I still have many years before retirement. The most important thing is that I have a plan in place — and I’m working each day to make it happen.

Part of that work involves keeping an eye on shifting market trends and rebalancing my dividend portfolio as appropriate.

What makes one stock better than any other?

Dividend shares, for those who don’t know, are shares in companies that pay out regular dividends to shareholders. A dividend is a percentage of an investor’s holdings, paid out either in cash or more shares.

For example, say a company pays out a 1p dividend per share each quarter, equivalent to 4p a year. If the shares cost 100p each, then investors get 4p back on their investment each year. We then say the company has a 4% dividend yield.

Does that mean it’s always best to pick stocks with the highest yields? Oh, if only it were that easy!

Dividend sustainability

The problem with many dividends is that they aren’t exactly reliable. They exist because a company has extra cash to spend — and giving that cash to shareholders is a good way to attract investment.

But when times get tough and profits slip, that cash needs to be spent on more pressing matters. And that’s when dividend cuts happen.

So the most important thing when hunting for dividend stocks is ascertaining their sustainability. To do this, we look at a few key metrics: payment history, payout ratio and dividend coverage.

One example

There’s a host of popular FTSE 100 dividend shares with excellent dividend sustainability metrics, such as BP, National Grid and Rio Tinto. But one lesser-known FTSE 250 dividend stock I’m a particular fan of is challenger bank OSB Group (LSE: OSB).

Its chunky 6.5% dividend yield is supported by a payout ratio of just 48.4%, meaning half its earnings are reinvested into the business. Subsequently, it has ample room to maintain or even raise distributions.

Cash flow comfortably covers dividends 2.39 times, highlighting the quality of earnings behind those payouts. Impressively, it’s delivered 11 consecutive years of uninterrupted dividends, with payments compounding at around 20% annually over the past decade.

Such a record reflects prudent risk management and consistent profitability, even through challenging interest rate cycles. 

Still, there’s a risk that short-term growth may slow slightly in a tougher housing market, limiting further dividend increases. But the combination of high coverage, moderate payout and strong cash generation makes OSB’s dividend sustainability look reassuringly solid and worth considering.

The bottom line

With careful analysis of all relevant factors, it’s possible to pick dividend shares that are likely to deliver long-term passive income.

But no single stock is a winner on its own. A diversified portfolio of 10-20 stocks will help to reduce sector- and regional-specific risks, while enhancing income stability.

The post This is how I pick dividend shares for my passive income portfolio appeared first on The Motley Fool UK.

Starting today, I’ll track both, see what happens, and report back with the results in due course. I’m not putting my own money behind what ChatGPT says, but I’ll be keeping score.

The portfolios

Right then, let’s get to it. The rules are pretty straightforward – dividends are reinvested back into the shares of the companies they came from and the highest total return wins. 

With that in hand, let’s get to the portfolios. Since ChatGPT gave me suggested weightings for each position, here are both portfolios with percentage allocations for each choice:

In both cases, we’ve mostly stuck to the FTSE 100 for ideas, but each team has an outsider. ChatGPT’s gone for OSB Group (LSE:OSB) and I’ve selected AEW REIT (LSE:AEWU).

Having seen the teams, I’m feeling pretty good. But I didn’t expect to see OSB Group making the list, so let’s have a closer look at the wildcard on Team ChatGPT.

OSB Group

OSB’s a specialist mortgage and savings business. It works a lot like a bank – taking in deposits, making loans, and earning a profit on the difference between the interest rates.

It specialises in loans for Buy-to-Let investors, developers, and commercial properties. Its focus in this area can give it an edge over more general competitors in terms of assessing risks.

Its lending margins have been pretty strong, but they’ve been starting to come down recently. This is due to higher interest rates increasing funding costs, which is a risk worth noting.

At the moment though, there’s a dividend yield of around 6% on offer. But while I’m interested in taking a closer look, I don’t think I like it as much as anything I’ve chosen.

AEW REIT

The wildcard in my portfolio is AEW REIT – a real estate investment trust (REIT) that doesn’t play by the usual rules. And it could just be the ace up my portfolio’s sleeve.

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.

Conventional wisdom says REITs are supposed to focus on properties with long-term leases in high-demand industries. That’s the usual way to try and achieve consistent rental income.

AEW focuses on unpopular sectors where demand’s weaker, but supply’s also low. And it looks for leases that are closer to expiry as potential opportunities for rent increases.

It’s a high-risk strategy with a much higher chance of vacant buildings. But the company’s executed incredibly well on its strategy and I think income investors should take a look.

Smart money

This particular competition is just for fun. I’m not willing to put my own money behind a portfolio generated by ChatGPT, especially when it contains a name I don’t know very well.

I am however, interested to see how the two portfolios get on. I’ll set up a simulation using my broker’s online platform – watch this space for future updates.

The post Can I beat ChatGPT in picking great dividend shares to buy? appeared first on The Motley Fool UK.

For an extra dollop of diversification, however, I reckon it’s also worth looking a little further down the market spectrum. Fact is, there are plenty of smaller businesses boasting great records of raising the amount of cash they return to investors every year.

Let’s take a closer look at one from the FTSE 250.

Soaring share price

Despite having a market cap approaching £2bn, I suspect OSB Group (LSE: OSB) — formerly OneSavings Bank — isn’t on the lips of most retail investors. However, the Chatham-based specialist mortgage lender and savings provider’s share price has been absolutely flying in 2025. We’re talking about a gain of around 35%!

Reasons for this include reassuring operating performance, growth in its net loan book, and share buybacks. The last of these can indicate that management thinks the stock is undervalued.

Clearly, all this good news won’t have done any harm to OSB’s income credentials either.

Passive income powerhouse

Right now, this stock boasts a forecast dividend yield of 6.5% for 2025. For perspective, that’s almost twice the yield of the mid-cap index as a whole.

OSB has also been raising its dividend nearly every year since it first started paying them 10 years ago. I say ‘nearly’ because holders didn’t receive anything in 2020. Back then, the Bank of England requested that all banks and lenders suspend dividends as a precautionary measure due to the uncertainty of Covid-19. But things kicked back in a year later.

Of course, a chunky dividend isn’t much good if there’s only a small chance it will actually be paid. But on this front, I don’t think OSB’s current shareholders should be worried. Assuming analysts projections are on the money, this year’s total cash return should be covered over twice by expected profit.

So, what might go wrong?

For balance, it’s worth considering how this company’s current momentum might stall or reverse and potentially put that passive income at risk of being cut. As good as the dividends are, the share price hasn’t been a stranger to volatility over the years.

The fact that OSB operates in a cyclical sector can’t be ignored. It could easily be impacted by wider economic wobbles and/or a housing market downturn. Regulatory changes could also take the shine off the investment case.

As far as the company itself is concerned, investors will want to see signs that margins aren’t being eroded and guidance is maintained. A Q3 update is due in early November.

I’d also prefer not to see so much director selling in recent months. While this is understandable given how well the shares have performed, a bit of buying wouldn’t go amiss.

Still cheap

These concerns aside, I think this stock warrants more attention from investors looking to build an income stream from the stock market. This is especially as it still only trades for the equivalent of seven times forecast earnings.

That valuation is good for stocks in the financials sector. But it smacks of a potential bargain relative to the UK shares as a whole.

The post 1 under-the-radar dividend growth stock to consider buying for passive income appeared first on The Motley Fool UK.

The amounts vary, but the most appealing names usually combine decent yields, sustainable coverage, and a track record of maintaining or even increasing their payouts.

Let’s break down a simple example. Imagine an investor starts with £7,000 and achieves a compound annual growth rate (CAGR) of 7%. After 20 years of reinvesting those dividends, the capital could grow to around £27,700.

At that level, a yield of 7% would mean an annual second income of roughly £1,940. That’s pretty close to the £2,000 mark.

Of course, that’s just a model – dividends aren’t guaranteed, and a falling share price could drag down the CAGR. This is why investors should diversify across several dividend shares rather than betting on just one. Choosing companies with strong earnings, stable cash flow, and reasonable payout ratios can help reduce the risk of income being cut.

The FTSE 100 hosts many popular dividend shares but I think there’s also a lot of untapped potential on FTSE 250.

A stock to consider

One FTSE 250 stock I think is worth weighing up is OSB Group (LSE: OSB). This is a challenger bank that focuses on niche mortgage lending and loans for small businesses. It operates through its OneSavings Bank and Charter Court Financial Services divisions.

While not a giant compared to the UK’s high street banks, OSB has carved out a profitable niche.

The stock has risen about 40% so far in 2025, but it still looks cheap. The shares currently trade on a forward price-to-earnings (P/E) ratio of just 7.65, which suggests the market isn’t overvaluing its earnings potential.

Profitability also looks robust, with a net margin of 13.2% and a return on equity (ROE) of 12%. That’s a decent return for shareholders.

From an income perspective, the yield’s more modest than some high-yield names at around 6.1%. However, it’s well-covered, with a payout ratio of 48% and sufficient cash generation to support the dividend.

That gives me confidence that payments could be maintained, assuming the business keeps performing.

Assessing viability

But it’s important to stress the risks. As a mortgage lender, OSB is highly sensitive to interest rate movements. A squeeze on net interest margins could hit profits, especially if the Bank of England shifts rates in a way that pressures lending spreads.

There’s also exposure to the UK housing market. A downturn in property values or rising default rates among borrowers could put a dent in earnings and dividends.

These are real factors investors need to weigh up before adding OSB to a portfolio.

For me, OSB is a stock worth considering as part of a diversified income strategy. Its valuation looks reasonable, profitability appears strong, and the dividend’s covered. But like all income shares, it comes with risk.

So building a portfolio of several reliable dividend payers is often the smarter approach to generating a long-term second income.

The post £7,000 in savings? Here’s one strategy to target a second income worth £2,000 a year appeared first on The Motley Fool UK.