Stocks to Ride Out the Downturn

Everyone knows the market has been sinking faster than the Titanic. It's down more than 14% year to date and 13% over the past year -- and it's unclear when it will recover.

But that doesn't mean you should get out of the market -- you just need to find the stocks that outperform it.

Look here
There is an often-overlooked corner of the market that has been shown to consistently outperform the market when it's going down: dividend stocks.

Dividend stocks are strong performers in general. Wharton professor Jeremy Siegel calculated that from 1972 to 2003, a full 97% of the market's returns came from reinvesting dividends. Professors Kathleen Fuller and Michael Goldstein found that, between 1970 and 2000, dividend stocks outperformed non-dividend stocks, but during down markets, dividend payers outperformed non-payers by an additional 1 to 1.5% per month.

And that can save your portfolio.

Picking winners
But not all dividend payers are equally supportive of your long-term goals. Some companies can't support their dividends over the long term, and some companies just aren't going to perform up to expectations.

So how can you tell the strong dividend payers from the next Bear Stearns? Our resident dividend gurus, James Early and Andy Cross, believe strong dividend stocks have these qualities:

• Sizable: Very small stocks are more likely to be bruised during market turmoil. James and Andy recommend limiting your search to stocks with a market cap of at least $1 billion.
• Little debt: Companies with large debt loads have little room to maneuver when things go wrong. The more debt the company has, the more it has to use its cash to pay interest on that debt instead of building the business. A debt-to-equity level below 1 suggests manageable debt loads.
• Trustworthy management: Trusted management is invaluable -- especially when they're making decisions with your money. While you can't quantify good management, low turnover and a management that is invested in the company are good signs.
• Large moat: Strong companies have persistent and sustainable competitive advantages which should keep them afloat.

To find companies that meet these criteria, I ran a screen using the institutional stock screening software Capital IQ. Here are some of the results:

Data from Capital IQ as of Sept. 11, 2008.

While these stocks aren't recommendations, they are a great starting point for further research.

Copyright © 2008 Universal Press Syndicate