(MONEY Magazine) – In 1998, you can rely on bonds to perform their traditional role as your portfolio's calming influence. Consider the evidence: During Halloween week in October, when stock prices were zigzagging like a bunch of panicky teens fleeing a monster on Elm Street, the price of the benchmark 30-year U.S. Treasury bond moved little and finished the week about where it started. In contrast, stocks tanked more than 7% on their worst trading day of the week.

Better yet, any swing that bond investors feel in 1998 is likely to be in their favor. Reason: With inflation subdued, the Federal Reserve is expected to leave interest rates alone or even to lower them. Thus 30-year Treasury yields could fall about a quarter of a percentage point to 5.75%, according to Michael Sivy, MONEY's chief investment strategist. Some forecasters see an even bigger drop, to around 5.5%. Such a decline could produce total returns--interest or dividends plus price appreciation--on bonds and other income investments that will beat the 9% you are likely to earn on the average blue-chip stock. Furthermore, top safe yields run as high as 8.3%.

Such a steady--and potentially profitable--outlook for bonds makes them an ideal investment to help you achieve your financial goals. Take for example Michael Kleeman, 48, and his wife Veronica Napoles, 46, of Larkspur, Calif., shown opposite. The couple keep 44% of their $150,000 bond portfolio in a high-quality intermediate-term corporate bond fund, 20% in a convertible fund, 13% apiece in municipal and global bond funds and 10% in a high-yield bond fund. The portfolio returned an average of 11% over the 12 months through Nov. 1, vs. about 9% for the Lehman Bros. bond index. Result: The couple are on target for paying their 10-year-old son's college bills starting in 2006. "Our bondholdings provide lower risk and predictable income," says Kleeman.

Whether you're adding to a well-established portfolio or just beginning to invest, the 10-year Treasury is next year's best bond to own. It recently yielded 5.85%, which means bondholders stand to earn a 9.6% total return for the year, assuming rates drop by half a point. In comparison, bonds with longer maturities pay higher yields--but not enough to justify the additional risk of losing principal if rates rise.

Your worst bond buy in '98 is a high-yield issue, better known as a junk bond. Junk recently yielded an average of 8.5%--just 2.5 percentage points more than Treasuries. "With this spread, you are not being paid enough for the extra default risk," says analyst James Floyd of Leuthold Weeden Research in Minneapolis.

If you aren't satisfied with the returns on bonds, without undue risk you can reach for yields of 7.8% to 8.3%--and, in some cases, total returns of 15% or more--by investing in preferred stocks, electric utilities and real estate investment trusts. The pros we consulted recommend eight such investments below.

PREFERRED STOCKS

So named because they have preference over common stock in dividend payouts, these issues mimic bonds in three ways. First and most important, preferreds offer specified, bondlike yields. Next, the issuers are graded for financial security by such well-known judges as Moody's and Standard & Poor's; in general, a BBB- rating or higher is an acceptable risk. Finally, the issues are callable, which means that the company can redeem them at a predetermined date. Thus you're assured of collecting the dividend only until the call date; after that, if rates drop, the issue is likely to be redeemed and you will have to reinvest your proceeds at the prevailing lower rate.

Three top preferreds are described below. (Note: The percentage that follows the name of the stock is its stated yield; the second percentage is the yield at the current price.)

Amerco 8.5% (ticker symbol: AO A; recently traded on the New York Stock Exchange at $25.50; 8.3% yield; grade: BBB-; earliest call: December 2000). A favorite of Richard Lehmann, publisher of Income Securities Advisor ($165 a year; 800-472-2680), this preferred was issued by $1.7 billion Amerco, best known as U-Haul's parent. But the company also owns real estate and insurance companies. Analysts believe that Amerco's financial strength--reflected in its projected 17% annual earnings growth over the next five years--means the company will have no problem paying its preferred dividends.

Lehman Bros. 8.3% (LEQ; NYSE, $25.50; 8.1%; BBB+; February 2001). Richard Young, editor of Richard C. Young's Intelligence Report ($199 a year; 800-777-5005), likes this $15.4 billion securities underwriter, and no wonder: As of November 1997, its annual earnings were running an estimated 35% ahead of last year's. Moreover, Lehman's BBB+ rating assures analysts that the company can continue to pay its preferred dividends even if hard times hit Wall Street.

Cadbury Schweppes 8.625% (CSD A; NYSE, $26.75; 8.1%; A-; April 2002). With $7 billion in annual revenues and a balance sheet recently strengthened by the $1 billion sale of some of its bottling plants to Coca-Cola, this London-based purveyor of chocolate and soft drinks is another Richard Young pick. Even with an 8.1% yield, you get a relatively high rating of A-.

ELECTRIC UTILITIES

For three years, most utility stocks have been depressed because of uncertainty over whether state regulators would approve key mergers and rate hikes. Recently, however, regulators have begun to rule in utilities' favor, thus unleashing the potential for gratifying double-digit returns. Unlike a decade ago, though, when you could differentiate between utilities based mainly on financial strength, you now have to select financially strong companies that also have solid growth prospects in a deregulated environment--and avoid those with high production costs or territories with tough competition.

Here are three top selections:

Atlantic Energy (ATE; NYSE, $19.25; 8%). The long-awaited merger of Atlantic City's $1 billion utility with $1 billion Delmarva Power in Wilmington, Del. is virtually certain in early 1998. The new company, to be named Connectiv, will supply power to a high-growth area that includes southern New Jersey and parts of Delaware, as well as Atlantic City.

The impending merger has soothed analysts' worries that Atlantic might be compelled to cut its dividend to boost its retained earnings and, hence, its stock price. Instead, analysts like David Schanzer of brokerage Janney Montgomery Scott in Philadelphia expect the merger to protect the payout by strengthening the utility's finances. Editor Gregory Weiss of the newsletter Investment Quality Trends ($275 for one year; 619-459-3818), predicts the stock will rise to $23 in 1998 for a 28% total return.

Central & South West (CSR; NYSE, $21.25; 8.1%). For the past three years, the stock of this $5.1 billion provider of electricity and natural gas in Arkansas, Louisiana, Oklahoma and Texas languished as the company tried to squeeze a rate increase out of Texas regulators. C&SW lost the battle recently--but analysts were pleased nonetheless because the state commission did not reduce rates as much as Wall Street pros had feared. C&SW's high yield makes it an excellent pick for income investors, says editor Michael Burke of the newsletter Investors Intelligence ($184 a year; 914-632-0422). CIBC Oppenheimer analyst Jonathan Raleigh sees C&SW's stock climbing to $24 next year for a 21% total return.

Peco Energy (PE; NYSE, $22.75; 7.9%). Regulators are expected to approve a settlement between consumer groups and $4.5 billion Peco, formerly Philadelphia Electric, which will let the utility boost rates to recover $4 billion of its investment in nuclear power plants. Mark Luftig, co-manager of the $140 million Strong American Utilities Fund, believes the stock could reach $27 over the next 12 months for a 27% total return.

REAL ESTATE INVESTMENT TRUSTS

The stocks of these companies, which invest in apartment complexes, office buildings and other properties, have boomed for two years as bargain hunters bid up the prices. But REITs have begun to cool as their shares have become more expensive. Thus in '98, the average REIT will likely track the Dow's estimated 9% return. But you can still find REITs that yield more than the industry's 5.8 % average and also offer potential capital gains. Analysts recommend these two first-rate trusts:

Associated Estates Realty (AEC; NYSE, $22.25; 8.3%). Because its properties are in relatively slow-growth areas, cash-flow gains will slacken at this $94.4 million Cleveland REIT, which owns apartment buildings in Indiana, Kentucky, Michigan, Ohio and Pennsylvania. But Baltimore analysts Catherine Creswell of brokerage BT Alex. Brown and Rod Petrick of Legg Mason still favor the REIT. Reason: Lack of competition will allow it to hold rents steady. In the meantime, as interest rates fall, Petrick sees Associated's stock rising to $25 over the next 12 months for a 21% total return.

Health & Retirement Properties (HRP; NYSE, $19; 7.8%). This $208 million REIT is the owner of 110 nursing homes and 26 assisted-living facilities, which serve elderly clients who can mostly take care of themselves but need help with some activities, such as housework. The REIT recently bought 29 office buildings in 15 states that are rented by various U.S. Government agencies. Analysts Robert Thornburg of brokerage D.A. Davidson in Great Falls, Mont. and Helen O'Donnell of PaineWebber in New York City have confidence in the staying power of the REIT's yield. In addition, O'Donnell believes falling interest rates could help the stock reach $20 in 1998 for a 15% total return.

In short, whether you choose a REIT or one of the other dividend-buoyed investments we've described, they clearly are your best bet to beat the market in the bumpy year ahead.