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 500 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 very 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.

With treasuries yielding only 2.9%, and health care and social security looming, dividend paying companies are a better long-term investment than the U.S. government. BP Prudhoe Bay Royalty Trust, Linn Energy, and Pengrowth Energy Trust have little or no debt, yield two to three times the treasury yield, and are backed by oil and gas assets in Alaska's Prudhoe Bay, the Andarko and Permian Basins, and Alberta, Canada respectively. While oil and gas companies in the Gulf are hurting, these certainly are not.

Terra Nitrogen
Terra Nitrogen is a cyclical stock that does well when the overall economy does well. The poor economic conditions have driven the stock price down to a level not seen since October 2008, while the fundamentals remain strong. The return on assets, profit margin, and earnings yield are all above the sector average, indicating Terra is well run. With a 6.9% dividend yield double the treasury yield, you can't go wrong with Terra Nitrogen.

Vodafone
While some investors like the cash flow from stateside telecoms like AT&T (NYSE: T) -- which has increased its dividends for 26 consecutive years -- savvier investors are looking at Vodafone. The company recently decided to increase its dividend by at least 7% per year for the next three years and also reported a large increase in earnings. What has investors excited is that Vodafone may soon begin reaping rewards from its stake in Verizon Wireless as Verizon Communications' (NYSE: VZ) management recently speculated the company may begin paying a dividend to Vodafone in 2012. Verizon Wireless, 45% owned by Vodafone and 55% owned by Verizon Communications, currently uses all its cash flow to pay down debt. If it were to pay out this cash flow as a dividend, Vodafone's cash flow would grow somewhere between 25%-40%

Is this a good time to hop on the oil and gas bandwagon, or do other companies such as Terra Nitrogen and Vodafone catch your eye? Let us know in the comments box below!