According to a 2012 Yale study, Warren Buffett's Berkshire Hathaway has the best risk adjusted return of any company or mutual fund that's 30+ years old.   

How can you emulate his results? The answer lies in an analysis of Berkshire's top five stock holdings which have three key characteristics: high-quality growing businesses with strong competitive advantages, large and consistently growing cash flows that allow for above average yields and decades of dividend growth, and each was purchased at a time when it was undervalued.

Growing dividends represent key Buffet qualities

Company Yield Long-Term Dividend Growth Record Annual Operating Cash Flow ($Billion)
Wells Fargo 2.70% 9.47% over 42 years na
Coca-Cola 3.10% 12.01% 52 years 10.8
American Express 1.20% 7.22% over 37 years 8.9
IBM 2.30% 14.26% over 52 years 17.3
Walmart 2.60% 23.33% over 40 years 23.9
Average 2.38% 13.26% over 44.6 years 15.2
S&P 500 1.96% 5.05% over 24 years  

Sources: Yahoo Finance, Multpl.com, Fastgraphs, Buyupside.com, CNBC

Buffett's affinity for dividend growth stocks isn't surprising, given that a 2004 study by money manager Ned Davis found that these stocks had been the best-performing class of equity investments between 1972 and 2004.

Dividend Policy Annual Return 1972-2004
S&P 500 8.5%
Non-dividend payers 4.3%
Dividend cutters and eliminators 5.2%
Dividend growers 7.2%
All dividend payers 10.1%
Dividend growers and initiators 10.6%

Source: "DIVIDENDS, METALS, AND 1960 REPLAYS," Ned Davis Research.

But why do high-yielding dividend growth stocks perform so well over time? Most likely because a high and growing dividend signifies that a company matches all of Buffett's investing criteria. 

For example, in order to pay a sustainable and growing dividend a company must generate significant and growing cash flows. This cash flow itself is likely an indication of a competitive advantage and pricing power, both characteristics of high-quality that Buffett looks for.

In addition, a long track record of dividend growth is a sign that management believes in rewarding shareholders and is disciplined in its growth approach. Specifically that means taking enough risks to grow the business but not overly large risks that could threaten the company or its dividend growth record.

Finally a higher than market average yield raises the probability that a stock isn't overvalued, which in turn helps maximize the odds of long-term market out performance.  

Given this information, how can you invest like Buffett? By choosing investments with the same characteristics that have served him so well: high-quality, high-yield, dividend growth stocks/MLPs. This will help you maximize your odds of beating the market and generating growing income that can help you maintain a high standard of living during retirement.

To jump-start your search, here are three companies that fit the mold of Buffett-style investments.

Company/MLP Yield Operating Cash Flows ($billion) Historic Dividend/Distribution Growth Rate Projected 5 Year Dividend/Distribution Growth Rate
Kinder Morgan 4.50% 10.50 12.17% 10.59%
Linn Energy 13.20% 1.6 3.43% 1.73%
Brookfield Infrastructure Partners 4.80% 0.7 13.08% 7.49%
Average 7.50% 4.27 9.56% 6.60%
S&P 500 1.89%   5.05% 5.05%

Sources: Multpl.com, Yahoo Finance, Fastgraphs.

Relative to the S&P 500, a portfolio consisting of Kinder Morgan Inc (NYSE:KMI), Linn Energy (NASDAQ:LINE) or its non-MLP equivalent LinnCo (NASDAQ:LNCO), and Brookfield Infrastructure Partners (NYSE:BIP) would have quadruple the yield and 31% faster dividend/distribution growth rate.

These three companies represent some of the finest high-yield dividend growth opportunities I've ever seen. Here's why.

Kinder Morgan Inc
Kinder Morgan Inc is America's largest operator of natural gas pipelines and represents one of the best ways for long-term investors to profit from America's oil and gas boom. Consider these estimates from research firm IHS:

  • By 2026, investment in America's energy sector will reach $890 billion. 
  • By 2035 investment in America's midstream (gathering, transportation pipelines, processing and storage facilities) infrastructure -- Kinder Morgan's specialty -- will amount to $640 billion.

Founder, President, and CEO Richard Kinder has stated that Kinder Morgan wishes to "pursue expansion and acquisitions in a target-rich environment." This includes a potential acquisition pool of 120 master limited partnerships with a combined enterprise value (cost to acquire) of $875 billion.

Kinder Morgan has a current and potential project backlog of $35 billion, and it recently announced the $71 billion merger of Kinder Morgan Inc with its three MLPs: Kinder Morgan Energy Partners, (NYSE:KMP), Kinder Morgan Management (NYSE:KMR), and El Paso Pipeline Partners (NYSE:EPB). Management has said it plans to increase the dividend by 16% in 2015 and 10% annually through 2020. 
This strong dividend growth and long-term acquisition and investment potential is why I consider Kinder Morgan one of the best retirement stocks in the U.S.

Linn Energy
There are three reasons you should consider Linn Energy or its non-MLP equivalent, LinnCo, for your retirement income portfolio. First, its sky-high yield is paid monthly, making it great for covering living expenses or accelerating the compounding power of dividend reinvestment.

Second, the yield is most likely safe thanks to Linn Energy's recent binge of deals/acquisitions, designed to replace high cost/fast declining assets with low cost/slow decline assets. Thanks to these deals, Linn expects to lower its capital expenditure costs by $550 million to $650 million per year, and generate a distribution coverage ratio of 1.1, indicating a safe payout that's ready to grow at its historical 3%-4% annual rate.

Third, management is looking for additional acquisitions to fuel future dividend growth. Given that Linn Energy has a proven track record of 62 successful acquisitions worth $17 billion since its IPO and has a $46 billion market to go hunting in, investors can expect further deals in the future.

Brookfield Infrastructure Partners
There are three key reasons to invest in Brookfield Infrastructure Partners.

First, it's one of the most diversified utilities on earth, owning many hard-to-replicate, cash-flow-generating assets all over the world, including: 3,400 kilometers of toll roads in Brazil and Chile, 98% of Chile's power transmission lines, 30 international ports, a railroad monopoly in Western Australia, the world's largest coal export terminal, and 15,000 kilometers of natural gas pipelines in the U.S., among many others.

Second, its diverse cash flow base is 90% regulated or under long-term contract, 70% of it is indexed to inflation, and 60% of it has no volume risk. This, along with a 62% payout ratio, means the payout is likely highly secure, even in a global economic downturn.

Finally, Brookfield Infrastructure is managed by Brookfield Asset Management, which manages $200 billion in assets and has over 100 years of experience running utilities, infrastructure, real estate, and private-equity investments. These companies are among the most respected names in their industries, and under their leadership they have grown Brookfield's funds from operations -- which pays the distribution -- by 28% per unit annually since 2009.

Takeaway
There are three key characteristics to look for if you want to replicate Warren Buffett's investing success: quality companies, above average yield, and consistently growing dividends/distributions. Kinder Morgan Inc, Linn Energy, and Brookfield Infrastructure Partners all represent excellent Buffett-like investments that exhibit all of these characteristics and make for great additions to any income or retirement portfolio.

Adam Galas has no position in any stocks mentioned. The Motley Fool recommends American Express, Berkshire Hathaway, Brookfield Infrastructure Partners, Coca-Cola, Kinder Morgan, and Wells Fargo. The Motley Fool owns shares of Berkshire Hathaway, International Business Machines, Kinder Morgan, and Wells Fargo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.