Pastes that come with your coolers will normally be fine to use, but if you're after a little more cooling something like MX-2 or Arctic Silver 5 is what most use. MX-4 is the latest in the 'MX' range which is a bit better than MX-2, but it's normally more expensive and doesn't warrant the price difference.
It does look like you're putting a little too less on as the whole surface should be connected through paste. Some people put a pea size drop of paste in the middle and let it spread as you tighten the cooler down, others spread the paste first - but personally I do them both. Put some paste on your CPU and spread it as thin as you can, but make sure that all of your CPU is covered. Then what I do is put four little blobs of paste on the CPU, about half way between the centre and the corners.
This way you know that your whole CPU should have contact with the cooler with paste in between, but if their are any gaps the extra blobs you've put on with spread out and fill them.
This is just my way - others will have their own method and claim it's the best I'm sure.
Just remember - too little paste is an issue, but you've got to put A LOT of paste on a cooler to have too much. Think of how many times you've opened a pre-built machine that has LOADS of paste on the CPU, or if you've ever opened a GPU - it's covered in the stuff.
It makes maybe 1-2C difference to have too much paste, but it can melt your CPU to have too little.
Keep that in mind
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