Image: Jim Jubak

Jim Jubak

If you can look past the pain of your losses and the fear that, three years after the Lehman Brothers bankruptcy, the global financial system is about to melt down again, the current market rout is an opportunity. It's an especially important opportunity for investors who are within 10 years or so of retirement and who have been planning to use income from their portfolios to fund part of that retirement.

I don't expect anyone to get giddy at this opportunity. It definitely falls into the "when life deals you lemons, make lemonade" category.

But if you can manage a long-term view that gets your thinking beyond the next quarter or two or three, you'll realize that one of the biggest challenges facing anyone thinking about retirement is where to find decent yields -- and that this sell-off has created some commendable yields in some very good stocks.

It will be a lot easier to put enough money aside to produce the retirement income you need if it's invested in something yielding 6% than if it's invested in something yielding 2%.

Here's the math

If you want to generate $2,500 a month in income from a portfolio -- that's $30,000 a year -- from 10-year Treasurys yielding 2% a year, you need a portfolio of $1.5 million. But if you invested in something paying 6%, then you need a portfolio of just $500,000. That's $1 million that you don't have to save, that you can invest in growth stocks, that you can use for college tuition or that you can spend on a house in Tuscany or wherever. Get the idea?

That's not the only reason to use this crunch as an opportunity to buy higher future yields. I'm also concerned with the likelihood that all the retiring boomers will start looking for income at about the same time. That could create the kind of intense competition for higher yields that bids those yields lower. Part of the reason to buy now is my worry that these higher yields will be extremely rare when everybody and his Aunt Tillie suddenly want to buy them.

I'm going to end this column with a list of five dividend-paying stocks that provide that kind of yield now -- thanks to this not-so-wonderful sell-off. This list is necessarily going to be different from my Dividend Income Portfolio. That portfolio looks for income now -- or at least income over the next 12 months or so. This list is looking to buy yield now for income in five to 10 years.

But I'm going to begin with some general principles and caveats that should guide you in putting together your own portfolio of this kind.

4 rules of income investing

1. Don't reach for current yield but ignore the risk to that yield in the future. It doesn't do any good to buy a 6% dividend now if the company later cuts the dividend and the higher yield isn't around when you need it for retirement in five to 10 years.

2. While you're doing your due diligence on company-specific risk, don't forget the larger macroeconomic risks, such as inflation. I think retirement is likely to be extremely challenging for boomers. We're looking at high odds for rising inflation in developed economies. (Yes, it is possible, I suppose, that governments in developed economies will balance their budgets instead of just printing money. But I'm not counting on it.) Inflation will erode the value of your income stream. That's why I'm advising you to look for income from dividend-paying stocks rather than fixed-income bonds. Dividends can go up over time, while a bond's payout is fixed at the time it is issued. Ideally, you'd like to earn a high yield from a company that is likely to raise dividends over time so you can keep ahead of inflation.

3. Don't forget the basic rules of portfolio diversification when building this high-yield future portfolio. Don't overload with picks from one sector -- even though financials offer an especially tempting target right now. Don't concentrate on a single country, economic zone or currency. Diversification is especially valuable in building a portfolio that's supposed to pay off in five or 10 years. You'll make mistakes, of course. But you should try to make sure that one mistake doesn't take down your entire portfolio.

4. The dollar isn't likely to be a stable store of value over the time period I'm talking about. That's the polite way of saying that persistent U.S. budget deficits, inflationary monetary policies and slow economic growth will steadily erode the value of the U.S. dollar. The best way to fight this that I can see -- given that gold doesn't pay any dividends -- is to put your income-producing investments into the stronger currencies in the world. As the recent devaluation of the Swiss franc through a peg to the euro shows, there aren't any guarantees that today's strong currency will be tomorrow's strong currency. But we can increase the chances of getting it right by looking at currencies from commodity economies or countries where the central banks have been very reluctant to depreciate or where the national government has a history of running a fiscally responsible ship.

Because this last principle is so important, I am tempted to call this the "strong currency dividend income portfolio."

Now, on to the picks (in alphabetical order). The last time I visited this topic, on Aug. 8, I gave you only two stocks -- and one of those, Svenska Handelsbanken, was very thinly traded in U.S. markets (although not in Stockholm). This go-round I'm going to give you five (including the original two), and three of them have good liquidity in U.S. markets.