5 Lifeboat Stocks

With the market down about 10% over the past three months, and concerns over Europe's debt crisis, China's slowing economy, and the BP spill still in the forefront of news, investors have every right to be concerned. To survive this downturn the question you should be asking yourself is, "Are my stocks lifeboats, ready to save me -- or wreckage sending me to the bottom?"

Hopefully you grabbed a lifeboat
To find lifeboats, I ran a screen on CAPS, the 165,000-investor-strong Fool intelligence database, looking for financially sound companies that pay a hefty dividend.

The criteria I used for the search was simple:

• I wanted to consider only stocks that our CAPS community classifies as being top quality. At least 250 active players have picked these businesses, and they all carry four- or five-star rankings, the highest possible out of five.
• Next, with the credit crunch sinking stocks left and right, I wanted stocks with little debt. The easiest way to find this is to screen for a debt to equity ratio below 0.5.
• I wanted to consider only businesses with some scale, meaning they have a market cap of at least $500 million.
• Finally, in these hard times you could always use some more change in your pocket. As such, I wanted stocks that actively return money to shareholders. I screened for companies with a dividend yield greater than 5%.

I found these lifeboats:

Source: Motley Fool CAPS.
*Assuming monthly dividends of $0.10.

Prospect Capital
Prospect capital is a business development company, similar to MVC Capital (Nasdaq: MVC) and TICC Capital (Nasdaq: TICC). These companies issue shares and borrow money and then invest in or lend to other businesses. They pay out at least 90 percent of their profits each year as dividends and enjoy tax benefits like REITs. Prospect Capital is down nearly 10% since June 18th, when it announced it was cutting its dividend 25% and changing from quarterly distributions of roughly $0.40 to monthly distributions of roughly $0.10. The company's chairman and CEO John Barry III had this to say, "Given the attractive environment for investment opportunities, we are adjusting our distributions to retain capital for reinvestment. We have closed numerous transactions in the past several weeks, and we currently enjoy a pipeline of term sheets and other future potential opportunities more robust than in the past." Since that announcement Prospect has lent over $63 million to two companies. With an expected yield of at least 12% and management seeing good opportunities for reinvestment, this is well worth considering.

Ares Capital
Ares Capital is also a business development company. In early 2010, it closed on its acquisition of Allied Capital to become the largest business development company in the U.S. Allied Capital's name might sound familiar, as noted hedge fund manager David Einhorn wrote a book in 2008 titled "Fooling Some of the People All of the Time: A Long Short Story," detailing his experience shorting Allied Capital. Ares Capital has been operating smoothly since the merger and CAPS members have taken notice, the stock was upgraded from three to four stars in June. With a 10.2% yield this is surely a company you can collect from.

Energy trusts
With 10-year Treasury bonds yielding only 3%, and the costs of health care and Social Security looming, dividend-paying companies are a better long-term investment than the U.S. government. Penn West Energy Trust, Permian Basin Trust, and Provident Energy Trust have little or no debt, yield two to three times the Treasury yield, and are backed by oil and gas assets throughout the U.S. and Canada. While oil and gas companies in the Gulf are hurting, these certainly are not.

Is this a good time to add some business development companies, or do other companies such as energy trusts catch your eye? Let us know in the comments section below!