(MONEY Magazine) – It may be time to reassess the Dow 10 investing strategy. That strategy, nicknamed the "dogs of the Dow," requires investors to buy equal dollar amounts of the 10 highest-yielding stocks in the Dow Jones industrial index, hold them for a year and then adjust the portfolio to include the latest top 10 yielders. Over the past 50 years, this approach has posted average annual returns of 16.7% vs. the Dow's 13.7%.

Now the Taxpayer Relief Act of 1997 will change the way the game is played. To take advantage of the new long-term capital gains rate of 20%, investors must hold stocks 18 months (see the story on page 98). So should followers of the Dow Dogs strategy rebalance their portfolios every 18 months? That wouldn't be a bad idea, says John Downes, editor of the newsletter Beating the Dow ($125; monthly; 800-477-3400). According to Downes, a follower of the 18-month strategy would have enjoyed an average 20.2% return over the past nine years vs. 19.3% with the traditional Dow 10 approach.

That's the good news. However, a recent study out of Brigham Young University in Provo, Utah shows that no matter when you rebalance your portfolio, much of the Dow 10's outperformance is lost when taxes and other factors are taken into account. Says Brigham Young University finance professor Grant McQueen: "Even if you hold stocks for 18 months, dividends--which make up most of the earnings in these high-yield stocks--are still taxed as ordinary income." Adds Downes: "For someone in the 39.6% tax bracket, the effect is to wipe out all the difference between the return of the Dow 10 and the Dow 30."

Does this mean the Dow 10 is, well, for the dogs? Not necessarily, says Eva Goren, a financial researcher in Beverly Hills, Mich. She says the strategy makes sense, even in the top tax bracket, if you kennel your Dow dogs in a tax-deferred Individual Retirement Account or Keogh. That way, you'll avoid any taxes until you pull your money out at a much lower rate when you retire.

--Lisa Reilly Cullen