Personally, I usually drink the milk, but only for certain cereals. For Cinnamon Toast Crunch, I guzzle that warm cinnamilk like it was lifegiving water. Same goes for Reese's Puffs and Cap'N Crunch. I don't do this for Lucky Charms or Trix, though, for obvious reasons.
As for dry cereal, any kind will do except for the powerdy-type ones.