Put Warren Buffett in Your Corner

Dividend stocks may be the best way to follow Warren Buffett's famous rules:

• Rule No. 1: Never lose money.
• Rule No. 2: Never forget rule No.1.

But that shouldn't be surprising. Being an investor whose aim is to never lose money means studying businesses that rule boring industries, make real products, and earn heaps of cash flow. More often than not, these types of stocks also offer generous dividend yields.

Consider Buffett's portfolio. Roughly half the stocks held by Berkshire Hathaway yield more than the S&P 500 average of 1.7%. Here's a sampling:

Get 97% of the market's returns automatically
Surely, some of this is coincidence. Buffett and curmudgeonly partner Charlie Munger have billions to invest. They're unlikely to buy stock in anything but the largest large caps, and large caps are always more likely to pay dividends.

Nevertheless, research conducted by Dr. Jeremy Siegel shows that 97% of the stock market's return from 1871 to 2003 can be traced to dividends. I think we can fairly give superinvestors like Buffett and Munger credit for following a smart strategy even if they don't follow it to the letter. Buffett and Munger, you see, don't reinvest dividends as Siegel's research suggests you should. They've done better by investing cash from dividends into their best ideas.

But what's good for them isn't necessarily good for you. That's why many of America's millionaires are buying, holding, and reinvesting in the stocks of sturdy businesses that have a history of increasing their dividend payouts. It's a no-brainer way to get rich. And I mean really rich.

Consider Wrigley (NYSE:WWY), which transformed $1,000 into more than $600,000 over 56 years of reinvesting dividends. That's more than a half-century of better-than-12% average annual returns, making Wrigley one of the market's most enriching long-term performers. Thank you, dividends.

From Buffett's portfolio to yours
I'll not pretend that owning dividend-paying stocks makes you like Buffett or Munger. It doesn't. But isn't it nice to know that, if you do choose to invest in cheap dividend payers, you're in good company?

That's how my Foolish colleagues James Early and Andy Cross see it. As lead advisors for Motley Fool Income Investor, they seek stocks that pay substantial dividends but also trade at a discount to their real worth.

Four of their current selections are also Buffett picks, including Bank of America. Take a 30-day free trial to Income Investor today to discover the identities of the other three. There's never an obligation to subscribe.

This article was originally published on Sept. 10, 2007. It has been updated.

Fool contributor Tim Beyers owned shares of Berkshire Hathaway at the time of publication. Berkshire Hathaway is an Inside Value pick and Stock Advisor recommendation. Bank of America and Wrigley are Income Investor picks. The Motley Fool holds stock in Berkshire Hathaway. The Motley Fool's disclosure policy wants to say something witty here but hasn't had its coffee yet. (Yawn.)