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. Playing the part of the investor whose aim is to never lose money is to study 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. Better than half the stocks held by Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) yield more dividends than the S&P 500 average of 1.67%. 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 one method of America's millionaires is to buy, hold, and reinvest 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 Kraft (NYSE:KFT), which transformed $1,000 into $2 million over 53 years of reinvesting dividends. That's more than a half-century of better-than-15% average annual returns, making Kraft one of the market's best-ever 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 colleague James Early sees it. As lead advisor for Motley Fool Income Investor, he seeks stocks that pay substantial dividends but also trade for a discount to their real worth.

Four of his current selections are also Buffett picks, including U.S. Bancorp. 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.

Fool contributor Tim Beyers owned shares of Berkshire Hathaway at the time of publication. Berkshire is a Motley Fool Inside Value and a Stock Advisor recommendation. U.S. Bancorp and Kraft are Income Investor picks. The Motley Fool's disclosure policy wants to say something witty here but hasn't had its coffee yet. (Yawn.)