Bucket #2: Income and Growth
(Mainstream investments yielding 3%–7%)

Here, you're taking a bit more risk in search of higher income and some capital appreciation as well. Over time, companies that steadily increase their dividends tend to be rewarded with a rising share price, creating a favorable total return.

The trick, as we've been vividly reminded of late, is to pinpoint businesses that will live up to their billing as dividend champions. McDonald's (MCD) is certainly one with a 3.71% yield. Procter & Gamble (PG) is another with a safe 3.38% yield, while Sysco (SYY) is paying 4.21%. (Get details on 5 recession-proof stocks to buy now here.)

Bucket #3: Outsized Yields
(Aggressive investments yielding 7%, 8% or higher)

The third bucket is reserved for aggressive investments (7%, 8% and higher yield) that can help furnish life's little extras — the Caribbean cruise you've been hankering for, the car with the leather interior, the sparkling new kitchen.

In today's market, a yield above 7% for a stock (or a bond) often signals some kind of distress. Not always, though.

A few investments feature what I call an "outsized" yield because of a misunderstanding. Wall Street is confusing them with other, superficially similar investments that carry much greater risk.

Right now, for example, investors are skittish about real estate. The average real estate investment trust (REIT) has cratered almost 75% since February 2007.

Is this enormous markdown justified?

In many cases, yes. However, I know of one conservatively financed REIT whose preferred shares are yielding close to 10%.