Smart investors look for some stock gems amid the rubble

— -- Given the stock market's wretched performance this year, your current retirement plan may involve a modest part-time job, such as woodworking or forgery.

Before you take up a life of crime, however, remember that really rotten markets sometimes uncover opportunities. In fact, the worse the market, the more bargains you can find. And right now, you can buy stocks and bonds of the nation's best-run and most profitable businesses at astoundingly low prices. What's more, you can collect dividends and interest while you wait for the economy to recover and for other investors to regain their senses.

First, and let's not whitewash things here, the current market has all the appeal of a weekend in the local viper pit. The Dow Jones industrial average plunged 679 points on Thursday alone; it has shed 5,585 points, or 39%, in the past 12 months.

And not all of the selling is hysterical. The banking system is a mess and the economy is sinking. People who bought stocks under the assumption that profits would rise have good reason to rethink their position. Nevertheless, when investors dump stocks in panic, sometimes good stocks get thrown out with the bad. In fact, when the stock market is in panic mode, good stocks often get thrown out first. Consider the plight of some hedge funds, which are freewheeling investment pools for the extremely wealthy.

Many hedge funds borrowed to buy stocks, a technique that increases gains in a rising market, but amplifies your pain when stocks fall. These funds now have to raise cash to repay their margin loans and to pay off departing investors.

"The reason for the sharp decline is massive selling from hedge funds — not because they want to, but because they have to reduce their leverage," says Kenneth Heebner, manager of CGM Mutual. "It's the biggest margin call since 1929."

In a big, panicky decline, big investors can't sell their worst investments, because no one wants them. Instead, they sell their best holdings, because they can be converted into cash quickly. And sometimes that means that you can buy very good stocks at good prices.

Let's start our search by eliminating the entire financial sector. Sure, there are probably good bargains there. But right now, it's hard to tell which banks, brokers or insurers will emerge unscathed.

One simple screen is the Dogs of the Dow. These stocks are the 10 stocks in the Dow that have the highest dividend yields. Why is a high dividend yield doggish? The dividend yield is a company's 12-month payout divided by its price. Many times, companies with high dividends aren't being generous. They have gotten their share prices slashed.

For example, a company that pays $1 a year per share in dividends has a 2% dividend when its share price is $50. If its price falls to $25, its dividend yield leaps to 4%. In theory, when you buy one of the 10 highest-yielding Dow stocks, you're buying stock of a big, financially strong company that is temporarily in distress. For example, General Electric gehas paid $1.24 per share in dividends the past 12 months. At its current share price, GE's dividend yield is 6.5%.

Now, it may well be that GE has harder times ahead. On the other hand, it's unlikely the company will cut its dividend. So you can collect 6.5% in dividends while you wait for the company to turn around. Other non-financial companies in the Dogs of the Dow: Pfizer pfe, Verizon vz, AT&T t, Merck mrk, DuPont dd, Home Depot hd and Alcoa aa. You can get more information on the Dogs of the Dow at

For those who don't want to pick individual stocks, an equity-income fund typically looks for stocks of strong, dividend-paying companies.

Investors have been dumping high-quality corporate bonds, too — and that means similarly high yields for retirees and pre-retirees who are comfortable with some risk. Currently, high-quality bonds are "as cheap as I've seen them in 50 years," says Loomis Sayles star bond-fund manager Dan Fuss. Cheap, to a bond-fund manager, means that a bond's yield is high, relative to comparable Treasury securities.

Buying individual bonds can be trickier than buying stocks, so you're probably better off investing in a high-quality bond fund. Managers Bond, a no-load fund also run by Fuss, is one good choice.

You probably won't buy stocks or bonds at the absolute bottom of the market. But investing in high-quality stocks and bonds now makes sense — and it's less likely to put you in the slammer than taking up forgery.

John Waggoner's new book, Bailout: What the Rescue of Bear Stearns and the Credit Crisis Mean for Your Investments, is available from John Wiley & Sons. His column appears Fridays. Click here for an index of Investing columns. His e-mail is