(FORTUNE Magazine) – Hey, batter, batter, batter. Step right up to the plate and swing at this unbelievable pitch for yield. What's that -- you're worried you'll strike out? Good thinking. With the Dow as high as a rising pop fly, it's the bottom of the ninth in the search for yield -- and home runs are harder to hit. For most of this year, nearly every yield seeker had a shot at the pennant for outstanding performance. According to First Boston, the highest-yielding shares in Standard & Poor's 500-stock index -- those posting yields above 3.8% -- were the best performers in the first nine months of the year, gaining an average of 8.3%, vs. a 5.3% advance for the index itself. Several yield- oriented sectors did even better. Energy stocks rose 13.8% through September, followed by banks and insurance stocks (up 11.8%), and utilities (10.4%). Buoyed by falling interest rates, bond investors were equally pleased. Through September, the 30-year Treasury returned 23.1%. But then came the curve balls. Yields on the long bond crept up from a low of 5.8% to 6.3% on new signs of economic strength, producing losses for fixed- income investors. In October and November, high-yield stocks in the S&P 500 fell 4.1%, erasing half the gains for 1993. Financial stocks took the severest beating, sliding an average of 9.9%, followed by 7.7% losses for energy stocks and 5.3% declines for utilities. It wasn't simply interest rates that hurt these shares. Banks, on a roll since 1990, are easy targets for profit taking; energy stocks are sinking with oil below $15 a barrel; and increasing competition in supplying electricity is cooling down utilities. What's a yield-needy soul to do? Here's a look at the prospects for various income-rich investments:

-- High-yield stocks. The word here: selectivity. Electric utilities, once a reliable source of dividend income, are becoming deregulated. The National Energy Policy Act, passed in 1992, allows wholesale customers -- municipalities, say -- to purchase energy from competing sources, not just the local power company. Utility investors today should stick to low-cost producers like PacifiCorp of Portland, Oregon, or Cincinnati Gas & Electric, which will benefit from competition. Chris Wiles of the Federated funds thinks PacifiCorp, one of the cheapest providers in the West, will eventually be able to sell electricity to California. Sally Haff, co-manager of the Franklin Utilities fund, likes Cincinnati, which is acquiring PSI Resources. In each case, the analysts look for a 9% total return in 1994. A rule of thumb for avoiding losers? Don't buy a stock yielding much more than the utility average of 5.9%, says Wiles. Selectivity is the key too for financial and energy stocks. Banks that are increasing the income they get from fee-based businesses like mutual funds will be hurt by rising interest rates less than traditional lenders will. Douglas Ober, who runs the Adams Express closed-end stock fund, is betting on First Union. The Charlotte, North Carolina, bank has made 15 acquisitions in the past three years and proposes to take over the Evergreen mutual fund group. Brian Rogers, manager of the T. Rowe Price Equity Income fund, likes Mellon Bank in Pittsburgh, which plans to acquire Dreyfus. Energy companies will likely remain out of favor as long as oil prices are low. But buy-and- hold investors might find the 5.5% yield of Atlantic Richfield tempting. Rogers thinks the $102 stock is easily worth $120, which would mean a 23% return. A new entrant in the high-yield stock category: the pharmaceutical industry. Once the darlings of growth stock investors, drug companies now face profit pressure. The question to ask: Is the dividend sustainable? Wiles of Federated recently compared the prospects for dividend cuts at American Home Products and Bristol-Myers Squibb, both yielding over 4.5%. He prefers American Home because the dividend represents 60% of 1993 earnings, vs. 90% for Bristol. Drug stocks are switching places with telephones. Once bought for yield, the telecom industry is now a growth play on the information highway. Yields are thin on most stocks. An exception: Southern New England Telecommunications, a Connecticut phone company that pays a 4.9% dividend. Its territory is surrounded by Nynex, which makes it a prime acquisition candidate, says Rogers of T. Rowe Price.

-- Preferred stocks. These seem attractive because they pay higher yields than common stocks, in exchange for less price appreciation. That's not necessarily a bad deal, but Robert Christensen, a portfolio manager with Stein Roe & Farnham, thinks individuals should not buy them. Why? Corporate buyers of preferred shares get to deduct 85% of the income from taxes, so the market tends to price a company's preferred stock relative to the common with the after-tax income in mind. Individuals, who are fully taxed on the dividend, may overpay for the yield they actually net.

-- Convertible preferred stocks and bonds. So far this year, the average convertible fund has returned an impressive 13.5%. But, says Richard Hoey, head of the $1.2 billion Dreyfus Growth & Income fund, ''the convertible bond bull market is over.'' He's finding few attractive new issues to add to the 30% of the fund that remains in converts. The bottom line: Hold what you've got, but don't look to buy more.

-- Real estate investment trusts. Talk about a boom. Forty-five new REITs have been offered to the public this year, not to mention numerous secondary offerings, and they have been snapped up quicker than a click. Equity REITs returned an average of 34% in the first nine months of the year before declining 6.4% in October and November. What's up for this industry? Says Michael Oliver, manager of the PRA Real Estate Securities fund and a seasoned industry follower: ''There are a lot of new players in the business, and there's no question that a few weeks ago the - group was overpriced. But I'm buying now. You want seasoned managements and real estate properties that are scarce, where there is little new construction.'' Operators of apartment buildings and strip shopping centers frequently fit the bill. Among Oliver's recommendations: Colonial Properties Trust, which yields over 8% and could return in excess of 15% this year.

-- Bonds. When interest rates rise, bond prices fall. If a fund is sold on the basis of yield, your principal may erode, so be wary. In a rising interest rate environment, Treasury bonds are the first to produce losses. Junk bonds should fare better because a recovering economy -- bad news for bonds -- is good for business and may produce upgraded credit ratings. Ian MacKinnon, Vanguard's bond fund chief, likes corporate bonds in general but not mortgage- backed bonds, where prepayment risk makes the sector ''treacherous.'' Pick a diversified fund that can move among sectors of the bond market. If you live in a high-tax state, consider munis. The best advice of all: Don't buy a fund, bond or otherwise, in December. That's when capital gains incurred over the year are distributed. Say you purchase a fund for $10 on December 29 and it makes a capital gains distribution of $1 per share the next day. Your fund's net asset value falls to $9, and you will have to fork over tax on the $1 to the IRS. If you wait, you would pay $9 for $9 worth of net asset value, rather than $10 for an after-tax $9.70 or so. Potential muni fund investors should also wait until January -- only interest income is tax-free. Taxable capital gains in Vanguard's long-term municipal portfolio will probably exceed 20 cents a share in 1993, representing about one-quarter of all income distributed.

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