The smartest way to put £500 in dividend stocks right now

For many years, the UK stock market has been a treasure trove of dividend stocks paying high yields. But will that trend continue?

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With the FTSE 100 currently trading near its highest level in history, dividend stocks may see their yields decreasing soon. This is because dividend yields aren’t set by the company but rather a ratio of how much the company is paying out compared to the share price. As the price rises, the stock costs more but the dividend remains the same, so the yield is a smaller percentage of the price.

However, there are still some opportunities to get decent dividends when the market is rallying. I think the best way is with investment trusts, as these tend to remain more stable in a volatile market.

Reliable > big

It’s easy to find a host of dividend stocks with big yields. A quick search will bring up companies like Vodafone, Imperial Brands, and BT Group. But top yields don’t necessarily equate to the best dividends. Vodafone recently slashed its dividend in half following months of falling prices. And tobacco companies often pump up their dividends to attract investment because some people consider the industry risky.

I prefer to go with stocks that have a proven track record of increasing their dividend year after year. A good place to find those is on the Association of Investment Companies’ ‘Dividend Heroes’ list. The list includes several notable investment trusts, including one I plan to buy this month, Murray Income Trust (LSE: MUT).

Diversified and reliable

With only a 4.3% yield, Murray Income Trust may not initially look attractive to dividend hunters. But the trust has increased its dividend for 50 consecutive years, so it’s certainly earned the word ‘trust’ in my eyes. The current dividend per share is 37p and earnings per share is 76p, so payments are well covered with a ratio of 56%.

I also see it’s highly diversified, providing exposure to business analytics (RELX), pharmaceuticals (AstraZeneca), consumer goods (Diageo, Unilever), and energy (BP, TotalEnergies).

It also includes finance-related companies like Sage, London Stock Exchange Group, Experian, and Intermediate Capital Group. The full list looks impressive to me and contains many companies I already own shares in.

Fees and risks

Like most trusts, Murray Income Trust comes with some fees. It has a 0.5% annual charge and 0.16% transaction cost. Naturally, this will slightly reduce any returns from the investment. As such, experienced investors may feel higher returns are possible by investing in the stocks individually. It’s certainly possible but would require more hands-on portfolio management. I like the passive income aspect of reliable investment trusts.

But with only 4.7% growth over five years, the trust’s share price performance has been low compared to some others. For example, Alliance Trust is up 57% and JPMorgan American Investment Trust is up 112%. However, these don’t offer the same reliable dividend payments.

The stock is currently trading at 862p, a 9.32% discount to the net asset value (NAV) of 955p. The 12-month average is -8.5%. This indicates the stock is cheaper than the value of the shares it represents and may have good potential for future growth.

Overall, I think Murray Income Trust is a great example of a dividend-paying stock that I would choose for small yet reliable returns. 

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.

Mark Hartley has positions in AstraZeneca Plc, Bp P.l.c., Bt Group Plc, Diageo Plc, Imperial Brands Plc, London Stock Exchange Group Plc, RELX, and Vodafone Group Public. The Motley Fool UK has recommended AstraZeneca Plc, Diageo Plc, Experian Plc, Imperial Brands Plc, RELX, Sage Group Plc, and Vodafone Group Public. 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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