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:



Debt-to-Equity Ratio

Insider Ownership

Market Cap (billions)

Barnes Group (NYSE:B)





Steelcase (NYSE:SCS)





American Eagle Outfitters (NYSE:AEO)





Royal Caribbean Cruises (NYSE:RCL)





Copano Energy (NASDAQ:CPNO)





World Wrestling Entertainment (NYSE:WWE)





Nu Skin Enterprises (NYSE:NUS)





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

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

The Foolish bottom line
When the market is choppy, strong dividend payers can keep your portfolio from drowning. And that means stocks that are sizable, free of debt, managed well, and in possession of competitive advantages.

That's exactly what we look for at Motley Fool Income Investor. Our picks are beating the market by 5 percentage points on average, and they have an average yield of more than 5%. A 30-day free trial gives you access to all of our recommendations, including our best bets for new money now. Click here to get started -- there's no obligation to subscribe.

Dan Dzombak is a Fool, not a clown. He does not have financial positions in any of the stocks in this article. Steelcase and Copano Energy are Motley Fool Income Investor recommendations. Royal Caribbean Cruises and American Eagle Outfitters are Stock Advisor picks. The Motley Fool owns shares of American Eagle Outfitters. The Fool's disclosure policy took a free trial, and now the dividend checks just keep rolling in.