The smartest dividend stocks to consider buying with £500 right now

In the past few years, the UK stock market’s been a great place to find dividend stocks paying top yields. But are yields set to fall?

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With the FTSE 100 hitting a new high above 8,000 points, top dividend stocks could see their yields start to fall.

And we might just be in for a bull run now, as confidence does seem to be rising. Investing services firms like Hargreaves Lansdown reckon sentiment among its customers is on the rise.

So what’s the smartest way to buy dividend stocks now?

Big = smart?

We could just go for the biggest yields. But would that be smart? We could end up buying something like Phoenix Group Holdings, British America Tobacco, M&G, Imperial Brands, and Legal & General.

At £500 apiece, we’d have £2,500 invested, with an average dividend yield of a whopping 9.2%.

But… three financials and two tobacco stocks?

Big yields can expose us to serious sector risk. Financials have been erratic in recent years. And tobacco is a cash cow now, but for how long?

Diversification = smart

I think there’s a smarter approach. I believe one of the smartest moves a dividend investor can make is to consider an investment trust.

I’d go for one of the Association of Investment Companies’ ‘Dividend Heroes’.

It’s raised its annual dividends for at least 20 years in a row, so I bought City of London Investment Trust (LSE: CTY). It doesn’t have the biggest yield at 5%, but I get bags of diversification.

Branch out

It also shows me some individual dividend stocks I might like to add. It holds Shell, for example, with a well-covered 3.7% yield. HSBC Holdings is in its top 10 too, on a 7.3% yield.

That’s exposure to finance, with the risk reduced by the diversification. And I can branch out further from there.

The main risk is that the share price could suffer if the dividend isn’t raised one year. With a mix of income and growth stocks, some don’t pay much at all. And, in a tough year, the balance could be critical.

Lifelong businesses

Then I’d look for cash generation, from businesses with potentially decades of visibility ahead of them.

Housebuilders are high on my list, and I see Taylor Wimpey has a forecast yield of 7.2% now. It can be erratic, and we’ve seen the pain that a slump can cause. But demand for homes? It has to keep going, doesn’t it?

Here again, there’s a nice way to diversify in property-related stocks. And that’s to go for a Real Estate Investment Trust (REIT), most of which have specific strategies.

Primary Health Properties, for example, invests in medical facilities. And it’s on a 7.4% forward dividend. But it does face property sector risk.

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.

Banks

I’d still buy a bank stock, and an insurance firm too. But only after I have a bit of safety tied down.

Financial firms can test the nerves in the short term. But the economy can’t do without them in the long term. And the long term, well, investing for that has to be the way of maximum smart.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Alan Oscroft has positions in City Of London Investment Trust Plc. The Motley Fool UK has recommended British American Tobacco P.l.c., HSBC Holdings, Hargreaves Lansdown Plc, Imperial Brands Plc, and M&g Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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