Nobody ever buys a stock expecting to lose money.

It's always a possibility, of course, but deep down we all believe that our latest investment idea is far more likely to deliver gains than losses -- why else would we have put our money there?

But as we all know, things don't always go according to plan.

Even the Warren Buffetts and Bill Millers of the world will occasionally misinterpret the signs or draw the wrong conclusions about a given company. And even if our assumptions are spot-on, the shares can still get blindsided by some unforeseen event: product recalls, SEC inquiries, severed fingers -- anything.

Confident though we may be, there's no denying that millions of us will have a few investment-related tax write-offs come April 15.

He swings and misses
One of those is Kirk Kerkorian, a renowned business magnate whose name is most often preceded by the term "billionaire investor."

As might be expected, the billionaire investor didn't get where he is today (the world's 53rd richest person) by making poor investments. This is the same man who shrewdly orchestrated the $6.4 billion buyout of Steve Wynn's Mirage in 2000 -- at the time the largest merger in the gaming industry.

Nevertheless, it's safe to say that Kerkorian's 10% stake in General Motors (NYSE:GM) didn't exactly pan out. In fact, his Tracinda Corp. recently unloaded the last of its 56 million shares, which despite rebounding sharply over the past year still netted a loss of about $8.6 million.

Kerkorian's biography reads much like a work of fiction. So it's only fitting that his well-publicized efforts to win a seat on GM's board and turn around the struggling automaker have been marked by quite a few plot twists. (Foolish colleague Tim Beyers chronicled the saga here, here, and here.)

The tale would seem to end on a down note, when Tracinda finally threw in the towel last month and sold a massive block of 28 million remaining shares to Bank of America (NYSE:BAC) -- the same company that arranged much of Kerkorian's financing in the first place.

Believe it or not, though, this story actually has a happy ending.

More than pocket change
First, it's worth pointing out that while a $9 million loss sounds painful to you and me, it actually equates to a near-breakeven result for Tracinda's total outlay of $1.94 billion.

More important, let's not forget that Kerkorian also collected a few dividends along the way -- $115.4 million, to be exact.

Over the past 20 months, General Motors has taken its shareholders on a stomach-churning ride. The stock plummeted in 2005, shedding nearly half its value, before roaring back with a vengeance last year.

In essence, that round trip in the share price left Tracinda right back where it started. Yet thanks to seven hefty dividend payments over that span, the company was able to pocket more than $100 million in cash and close out the position with a respectable total return of around 5%.

The irony here is that Kerkorian himself (ever the shareholder activist) actively pressured GM's board into reducing the firm's dividend by half last February.

To be sure, the long-term impact of that decision is open for debate. However, there can be no arguing that in this case, those dividend distributions formed a safety net that turned a guaranteed loss into a solid nine-figure profit.

And counting ...
Depending on your view, Kerkorian may or may not have misfired by investing in General Motors. Either way, with a net worth that is roughly half of General Motors' entire $17 billion market cap, I don't think he'll lose much sleep over the matter.

As for the rest of us, the final outcome of this story illustrates a very important lesson: Dividends can help bail us out of a sinking investment -- you know, the ones we seldom expect to make.

First, and most obvious, dividends act as a cushion, putting cash in our pocket to help offset a drop in the shares or to reinvest at a lower price and reduce our cost basis. At the same time, dividends also have a hidden benefit that is felt rather than seen. Whenever a dividend-paying stock is retreating, its yield by definition will climb, thereby attracting additional buying interest that might staunch the bleeding.

Get a head start
Of course, dividends can be even more powerful when the stock cooperates and moves forward rather than backward.

Just look at the long-term performance of high-yield favorites Duke Energy (NYSE:DUK) and Washington Mutual (NYSE:WM). Unlike General Motors, these two companies are on solid financial footing. Rather than cutting dividends, they have a proven commitment to boosting payments year in and year out.

With hefty yields approaching 5%, both essentially hand out around half of the market's average return each year -- before the shares budge a single penny.

Foolish final thoughts
But like all Motley Fool Income Investor recommendations, these firms offer much more than just an above-average yield -- and the shares have also delivered solid gains over the past decade.

Aside from a generous (and rising) stream of dividends, James Early and the Income Investor team target companies with healthy cash flow generation and attractive long-term growth prospects. To date, the portfolio has posted an impressive average return of 29.5%, beating the S&P 500 by a wide margin -- with far less volatility.

If you're looking to reduce downside risk while also harnessing the wealth-building power of compound interest, dividends are your best bet. You can view our favorite dividend-paying stocks right now by visiting Income Investor free for the next 30 days.

Who knows, with a little luck, maybe one day you, too, can lose $8.6 million as happily as Kirk Kerkorian.

Fool contributor Nathan Slaughter owns shares of Bank of America, but none of the other companies mentioned. Bank of America, Duke Energy, and Washington Mutual are Income Investor picks. The Fool has a disclosure policy.