If you're looking to generate some reliable, recurring investment income but aren't interested in getting to know a new company -- or even a new industry -- you're in luck. There are plenty of dividend-paying stocks out there that are easy to understand.
There are three great dividend payers, in fact, that you may not need to do much pre-purchase homework on. You can plug into their current, healthy yields right now and simply check in from time to time.
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1. Citigroup
The banking business is pretty straightforward. Banks make money by extending loans and then collecting interest on those loans while the borrowers pay that money back over time. Often, a bank will have to borrow (from the government) the money it's lending out, but the interest rates that the bank are charged are always lower than the rates it charges its customers. Megabank Citigroup (C 1.30%) has done pretty well following this straightforward business model.
Citigroup is more than just a lender, of course. It also offers investment banking services, credit card services, and stock and bond trading, and it handles consumers as well as corporate clients. All of these offerings also generate fees, one way or another. First and foremost though, Citi's biggest cash cow is usually its net interest income on loans.
And that's what makes banks like Citigroup such great dividend stocks. As reliably as you pay on your mortgage or make your auto loan payments, this company rakes in income that more than supports its dividend payouts. Last year, for instance, Citi dished out $2.04 per share in dividends but earned an incredible $10.14 per share.
You can plug into this stock while the dividend yield stands at nearly 3.4%, which is well above the market's average dividend stock yield at this point in time (1.4% for the S&P 500).
2. Verizon Communications
While Citigroup's current yield of 3.4% is good, Verizon Communications' (VZ 0.42%) yield is decidedly better. Newcomers will enjoy a dividend yield of around 4.9% at the stock's current price, which is one of the market's best payouts among blue-chip stocks.
Again, this one isn't a complicated business. Verizon is the United States' biggest mobile phone service provider, according to Strategy Analytics, accounting for around a third of the total wireless market.
It's also an ideal business for supporting dividends for the obvious reason -- folks love their mobile phones and will do nearly anything to remain connected to the rest of the world. For better or worse, cellphone addiction is a real thing. Consumers might skip a meal or postpone a vacation when money gets tight, but they're going to pay their monthly wireless bill. It's just a matter of to whom.
To this end, Verizon does a pretty good job of making sure it remains the country's top service provider. Last quarter's churn rate was a mere 1%, meaning of the 142 million wireless customers it currently serves, 99% of them were also customers a quarter earlier.
Bonus perk: Verizon's dividend has increased every year for the past 15 years. It's not apt to lose interest in growing its payout now, as it is working toward a Dividend Aristocrat status.
3. Merck
Finally, add Merck (MRK 0.22%) to your list of easy-to-understand dividend stocks.
As you likely already know, Merck is a pharmaceutical giant. It's been in the drug business for well over a century and is the pharma industry's sixth-biggest company as measured by market cap, as well as the world's fifth-biggest pharmaceutical company (as measured by 2021's sales), according to data compiled by Proclinical.
That being said, what's not quite as obvious is how Merck remains so big. While its portfolio of drugs is diversified, it's probably not as diversified as you might think. At this time, Merck's only marketing about a dozen drugs, and one of them -- cancer-fighting Keytruda -- accounts for roughly a third of its total revenue. That's not exactly a degree of diversification one might expect from a stalwart pharmaceutical outfit.
The thing is, it's not exactly an unusual revenue mix for most drugmakers. Blockbuster drugs come and go all the time, and most companies like Merck remain vigilant about constantly replacing aging ones with newer prescription pharmaceuticals. This constant renewal of its drug portfolio of course supports reliable quarterly dividend payments, which the company has dished out every quarter for over 30 years. It's upped its annual dividend payment in each of the past 10 years, and thanks to the stock's recent price lethargy, you can get in while the dividend yield stands at a healthy 3.6%.
Give yourself the best chance at success
Sure, none of these names will ever dish out jaw-dropping stock price growth, and if you look hard enough, you can probably find higher dividend yields. What you're swapping out for heroic return potential, however, is the ability to sleep well at night.
Think about one of Warren Buffett's most brilliant nuggets of wisdom: "Buy what you know." That doesn't necessarily mean you have to be an industry expert on every pick in your portfolio. It does mean, however, you should stick to companies with business plans you can actually understand so you know when something's amiss. At the very least, this gives you a much better chance of adhering to Buffett's first rule of investing: "Never lose money."
