Contrarian investors should utilize times like this to differentiate between stocks that are dropping for fundamentally sound reasons -- and those stocks that are simply being dragged down because of general market concerns. Sure, there's plenty to worry about -- gigantic federal deficits, sovereign debt problems in Europe, an economic slowdown in China. But let's not forget that in the midst of all of this volatility lies the prospect to grab some great companies at dirt-cheap prices.

In particular, I'm a huge fan of dividend stocks. Renowned professor Jeremy Siegel has illustrated that from 1957 to 2003, when reinvesting dividends, the S&P's 100 highest-yielding stocks outperformed the market by an average of three percentage points. Over a long period of time, three percentage points can really add up. So if you can find dividend stocks trading cheaply, and can separate the good from the bad, you may have found yourself a real winner.

In this regular series, I run a screen for four- or five-star dividend stocks (yields above 2.0%) that have gotten crushed in the past 13 weeks, in addition to companies that are trading at low P/Es. Below is a selection of defense stocks that I like, additionally rated by our own 165,000-strong CAPS community. They are listed in rank order by the lowest P/E multiples:

Company

Dividend Yield

P/E Multiple

13-Week Price Change

CAPS Rating

L3 Communications (NYSE: LLL)

2.4%

8.5

(17.3%)

*****

Lockheed Martin (NYSE: LMT)

3.6%

8.9

(9.3%)

****

General Dynamics (NYSE: GD)

3.0%

9.1

(13.2%)

****

Raytheon (NYSE: RTN)

3.4%

10.4

(14.1%)

****

Honeywell (NYSE: HON)

3.1%

13.8

(5.4%)

****

Source: CAPS. Data as of Aug. 30, 2010. Price change since June 4.

If you're concerned about bond yields and the future of their returns, now is a great time to check out dividend-paying stocks, especially ones that you can buy at a reasonable price.  Not only will they provide you with income to help out with current expenses, but they also have potential for capital appreciation, something that any long-term investor should always be seeking.

This definitely isn't a list of automatic buy recommendations; however, it is a great place to start doing your own due diligence if you're interested in some great-looking, cheap defense stocks.

Have a different opinion? Sound off in the comments below, or head over to the CAPS page and let us know what you think!

Jordan DiPietro owns no shares above. General Dynamics is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.