Rule No. 1: Don't lose money.
Rule No. 2: Never forget rule No. 1.

--Warren Buffett

Have you ever lost big money in stocks? The best advice for finding winning stocks won't help if you're casting your line from a leaky boat. More simply, sometimes the best way to end up with a big pot of money come retirement is to not bleed yourself dry on the way there.

Investors want to take as little risk as possible, which usually connotes paying dearly in the form of lost potential returns. But how about combining low risk with a six percentage point yearly advantage? That's the power of dividends, something I'm especially familiar with from my daily work.

The amazing power of dividends
Respected research outfit Ned Davis found that from 1972 to 2005, S&P 500 dividend payers returned 10.1% annualized, whereas nonpayers returned a far lower 4.1% annualized. That's an enormous difference, and a huge reason to consider dividend-paying stocks. Receiving a portion of your return in cash every year goes a long way toward reducing your overall investment risk.

Because dividend payers tend to be more stable companies, I tend to recommend reinvesting those dividends -- the compounding power of reinvested dividends is nothing short of mind-blowing.

Seven stocks to start you off
Let's put the rubber to the road. Here are seven stocks -- from a screen using Thomson Financial -- that both pay a dividend and have a low beta, a measure of volatility relative to the S&P 500. A stock with a volatility that matched the market's would have a beta of 1. Beta is a measure of past volatility, and though it's arguably the closest proxy for risk, it's still only a proxy; a low-beta stock could still be risky. And though these are screen results, not recommendations, a starting point is something we all need in investing.

Stock

Yield (%)

Beta

Coca-Cola (NYSE:KO)

2.6

.71

AT&T (NYSE:T)

4.1

.89

AstraZeneca (NYSE:AZN)

2.5

.62

Bank of America (NYSE:BAC)

4.2

.79

CNOOC (NYSE:CEO)

2.6

.93

Vodafone (NYSE:VOD)

4.4

.93

Verizon (NYSE:VZ)

4.3

.93



What else should you look for as you put the power of dividends to work? A number of things, but I always suggest a look at management early on in evaluating a company. The Internet makes it relatively easy to find out tenure, years of overall experience, compensation, and stock transactions. Individually, no data point tells the whole story, but taken together, these bits of information can be powerful. They're part of what I use in Motley Fool Income Investor, a dividend-oriented investment service I run on behalf of the Fool.

Have some Income Investor selections lost money? You bet: If you're investing, you're going to lose money sometimes. But overall, the service is walloping the market by more than seven percentage points! Take a look for yourself -- a guest pass is available through this link.

James Early owns shares of CNOOC. Bank of America is a Motley Fool Income Investor selection. Coca-Cola and Vodafone are Inside Value recommendations. The Motley Fool has a disclosure policy.