I think it's safe to say everything is out of favor these days. A once-in-a-generation financial crisis should, as the phrase suggests, not arrive too often. But the markets will eventually turn around, and what we're seeing in the past week - escalating levels of fear - is actually a good thing.

As soon as the aggregate fear level peaks, stocks can form bottoms. We may even get a modest "snapback" rally if some portion of the global windshield - muddied and rain-soaked as it is - can be made clear to investors, but which stocks will lead us out of this perfect disaster, this financial crisis that is as much about confidence as it is earnings or balance sheets.

Blue chip companies have proved themselves to be well-established leaders in their markets and industries, and demonstrated consistently strong balance sheets over many years. They can earn a profit not only in the good times but remain profitable during recessions. (For related reading, see Recession-Proof Your Portfolio.)

Cash Flow = Flexibility
Blue chips generate high levels of cash flow from their core operating segments, which gives the managers many options and invaluable flexibility. They can choose to increase capital expenditures to drive revenue growth, or leverage their assets with debt at favorably low interest rates. They can pay dividends, increase them over time, and repurchase shares at opportune times. (For more reading on stock buybacks take a gander at A Breakdown Of Stock Buybacks.)

Blue chip stocks are generally larger in size and less volatile than broad market averages, which typically manifests itself with a Beta below 1 and market capitalizations of $3-5 billion and up. But this is not always the case, especially when markets go into a crisis mode like we're seeing now. Even the safest of companies can easily see 10-20% losses or more in a single day, and be spared none of the damage laid out to the stocks of their peers and competitors.

10 Blue Chips that are Down, But Not Out
Each of the stocks below meets the criteria outlined above. These companies are long-term leaders in their respective industries, and they have all proven able to earn a profit in good times and bad. They have the sometimes-intangible benefits of strong brands, leading market share, intellectual property, and high barriers to entry.

In a market where many blue chip shares have dropped 25%, 50% or more in the past 12 months, you should be able to find stocks that fit your diversification needs while sporting dividend yields above the benchmark rate. In fact, you should demand high yields in nearly all your blue chip holdings in such a deep market downturn; all but one of these 10 offer yields above the benchmark yield (10-year U.S. treasury) of 3.4%.

I added an extra filter to include only companies with current ratios over 1.0; this good score on the short-term liquidity meter is an important trait in this frozen credit environment.

Ticker Company Sector Market Cap () P/E Yield (%)
NYSE:BP BP plc Energy 142 6.8 7.36
NYSE:RAI Reynolds American Staples 13 8.7 7
NYSE:PFE Pfizer Healthcare 126 14 6.7
NYSE:DOW Dow Chemical Materials 27 10.8 5.73

Staples 38 14.8 5.1
NYSE:MRK Merck & Co. Healthcare 64 13.2 5.1
NYSE:HD Home Depot Consumer 39 11.9 3.78
NYSE:MMM 3M Company Industrials 44 12 3.1
NYSE:ITW Illinois Tool Works Industrials 20 11.6 3.17
NYSE:MSFT Microsoft Technology 227 13.3 2.1

Special Mention to Microsoft

I chose to give the nod to Microsoft for this list even though the current yield of 2.1% is below my stated benchmark. Microsoft generates more than $15 billion in free cash flow annually, and shares are currently trading at their lowest P/E levels in more than a decade. The company's core operating system and software segments still dominate in terms of market share, and Microsoft has been steadily raising its dividend since it issued its very first one in 2005.

Pfizer a Pharma-Bond
Pfizer's share price has been on a steady decline since the summer of 2000. The company has been hampered with slowing growth amid generic competition, patent expirations, and a tougher regulatory environment from the FDA.

To keep investors attracted to shares, Pfizer has more than tripled its dividend since 2000, from 9 cents per quarter to 32 cents today. With a yield currently over 6.8% and nearly $30 billion in cash equivalents, it's hard to not be attracted to the world's largest pharmaceutical company, with roughly $50 billion in annual revenue.

Parting Thoughts
The blue chips listed here may not lead their sectors in percentage gains when the market finally starts to rebound, but the dividends provide a measure of income while you wait out the current storm, and these market leaders may see limited downsides given their low earnings multiples, strong balance sheets, and steady reputations.

For related reading, see "Widow And Orphan Stocks": Do They Still Exist?