NEW YORK (CNN/Money) – The strategy is simple. Buy the 10 stocks in the Dow Jones industrial average that finish the calendar year with the highest dividend yields. Then watch them outperform the market.

It's called the Dogs of the Dow strategy, and it actually does work. According to the Web site Dogs of the Dow, this method of investing has had an average 10-year total return (including dividends) of 15 percent, versus 14.1 percent for the S&P 500.

The strategy hasn't been as profitable during the bear market. After gaining 6.4 percent in 2000, the Dogs were down 4.9 percent in 2001 and 10.4 percent in 2002. But that's much better than the S&P 500, which suffered double-digit declines in each of the past three years.

The outperformance isn't some statistical quirk. The approach is just a disciplined way to buy quality stocks (they're in the Dow, after all) that are out of favor (marked by a high dividend yield, which rises as stock prices sink). The theory is that quality companies will turn around eventually, and you're getting above-average income while you wait.

So who are the Dow's pooches this year? The list is extremely similar to 2002. Seven of last year's Dogs remain Dogs in 2003. The three new ones are General Electric, Caterpillar, and AT&T, replacing Exxon Mobil, Merck, and International Paper.

See the table for the complete list, their dividend yields, and last year's performance.

But money managers who use the Dogs of the Dow strategy are optimistic that 2003 will be a banner year for these stocks, since President Bush is expected to make dividend taxation one of the key parts of an economic stimulus package.

Currently, companies pay dividends with after-tax profits and investors pay tax on the income they receive. For this reason, dividends are said to be double-taxed. The hope is that Congress will eliminate one of the taxes and that, by doing so, investors will be more inclined to buy high-yielding stocks.

"The Dogs of the Dow and other high-yielding stocks will be big beneficiaries of dividend taxation relief," says Francis Gannon, manager of the Sun America Dogs of Wall Street fund.

The fund invests in the Dow canines as well as other dividend-paying stocks, including Clorox and Brown Forman, the maker of Jack Daniel's and Southern Comfort. It declined 7.1 percent in 2002 but was a winner in 2000 and 2001, rising 2 percent and 7.7 percent, respectively.

Neil Hennessy, manager of the Hennessy Leveraged Dogs fund, thinks the Dogs of the Dow are great values right now since they offer even better yields than Treasury bonds. The average dividend yield for the 10 Dow dogs is 4.3 percent. The yields on the 5-year and 10-year Treasurys are currently about 3 percent and 4 percent, respectively.

"With these stocks, you're not only getting income but capital gains as well," says Hennessy, whose mutual fund invests in the Dogs of the Dow as well as U.S. Treasury bonds. Hennessy's fund fell 8.7 percent in 2002 but it was up 6.9 percent in 2000 and flat in 2001.

But keep in mind that these stocks are called Dogs for a reason. The dividend yield is the annual dividend per share divided by the stock price (Philip Morris, for example, pays a dividend of $2.56 per share. So if you buy a share of stock for $40, you're getting a yield of 6.3 percent.)

If you see a huge yield, it is usually because the stock price has plummeted, which could be a sign of value -- or of more trouble ahead.

That's why a modified Dogs of the Dow strategy might make sense. Jim Denney, manager of the Electric City Dividend fund, is more selective. He owns only three of the 10 Dogs -- General Electric, Honeywell and SBC Communications.

Denney says that he bought General Electric in the fourth quarter of 2002 for the first time ever in his fund because he believed investors had gone overboard in dumping the stock. "It definitely jumps out when you see a high quality company with such a high dividend," he said.

Instead of just buying all 10 Dogs, Denney thinks it is safer to look at what sector each of the Dogs are in and seek other high-yielding stocks in that sector that might be less risky. For example, even though J.P. Morgan Chase has a yield of 5.7 percent, Denney does not own it. But he owns Citigroup, which is also in the Dow and has a yield of just 2.1 percent, because he is more confident about Citigroup's earnings outlook.