For sessile organisms, dispersal and recruitment are typically spatially stochastic, but there is little understanding of how this variability scales up to influence processes such as competitive coexistence. Here we argue that coexistence of benthic marine animals is enhanced by stochastic differences between species in the spatial distribution of larval settlement. Differentiation of settlement distributions among competitors results in intraspecifically aggregated settlement, which can reduce overall interspecific competition and increase overall intraspecific competition. We test for the components of this mechanism using a pair of subtidal invertebrates, and we find that the mean interspecific effect of the dominant competitor is substantially reduced by natural settlement variability. Using a simulation parameterized with experimental data, we find that variable settlement could play an important role in long-term coexistence between these species. This mechanism may apply broadly to benthic marine communities, which can be highly diverse and typically exhibit large settlement fluctuation over a range of scales.