I've noticed a disturbing trend: more executives are being forced to sell because of margin calls.

Chesapeake Energy CEO Aubrey McClendon forfeited virtually his entire stake in the company he co-founded 20 years ago. More recent victims include insiders at Sterling Construction (Nasdaq: STRL).

A more than marginally bad idea
Margin is debt. When you buy on margin, you're borrowing from your broker to buy more shares than the cash in your account would normally allow. It's a secured loan, insured by the value of your portfolio's holdings.

As you might expect, margin is often popular during bull markets, because of how it can multiply returns. You pocket the difference between what you pay in interest and what you earn in gains, and it feels like free money.

The trouble starts when stocks fall. Brokers require a minimum amount of equity for each dollar of borrowing -- often as much as 50%. Lose equity via a depressed share price, and you'll be exposed to a margin call. At that point, your choices are to (a) add cash to your account or (b) sell shares to raise capital.

Insiders who borrow to buy, and are then forced to sell, create a particularly vexing problem. High-volume insider selling tends to breed institutional selling (i.e., hedge and mutual funds), which depresses prices and, in turn, creates more margin selling.

Not to mention non-margin selling. History shows that investors often panic when selling starts. Already, we've seen two panics in the past year. The more leverage out there, the more likely that we'll see yet another panic -- one that might push the Dow down closer to 5,000.

A strategy for the worst of times
Writing that almost puts me into a full-blown, thumb-sucking, fetal-position panic. But I'm soothed by the monster month that March was. April and May, too, helped my frayed nerves. And yet, even with these gains, the S&P 500 is only even for 2009.

Losses could revisit us at any moment. Mr. Market is like that. Can there be any hope for buy-to-hold investors? Or have we all been banished to Shortville, where every sentence ends with "booyah," every dinner is ice cream and gumballs, and every stock is so toxic that short-selling feels like a sure path to fabulous wealth?

I think there's hope for us long-termers. Look at the evidence. Even if it seems like every stock is toxic, some have been outstanding. Stocks that produced free cash flow, maintained sturdy balance sheets, and paid dividends did particularly well during 2008.

Church & Dwight (NYSE: CHD), for example, was a rare stock market winner in 2008. The retailer is what researcher Mergent calls a "Dividend Achiever" for its history of paying ever-higher dividends over the course of decades, even in the face of earlier recessions. Other notable dividend winners from last year include Nordic American Tanker Shipping (NYSE: NAT), GlaxoSmithKline (NYSE: GSK), and Cal-Maine Foods (Nasdaq: CALM).

Looking back over a longer period -- 1970 to 2000 -- Professors Kathleen Fuller and Michael Goldstein found that dividend-paying stocks outperformed non-dividend-paying stocks during market declines by an average of 1% to 1.5% per month. Continued...