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The dividend stock picking system I introduced last month received a lot of interest from the readers, so I worked on it further and it has undergone some significant fine-tuning and enhancements. This month's list is the product of the new Version 2.0. The stocks are ranked based on their Potency Score, which is the name of the system. This score is also the forecast of a company's 7-year dividend yield-on-cost (7YYoC).

The metrics used to calculate the Potency Score are:

1. The current Dividend Yield

2. The Dividend Growth Rate (DGR) for 1-, 3-, 5-, and 10-year periods

3. The projected annual Earnings per Share (EPS) growth rate for the next five years

4. The Payout Ratio

5. The P/E Ratio (forward)

6. The Return on Equity (ROE) 5-year average

7. The Dividend to Free Cash Flow Ratio

The metrics numbers 1-5 are from the original version, but with substantial adjustments and fine tuning of numbers 2-5. The two metrics ROE and Dividend to FCF Ratio are new to Ver. 2, and I believe they significantly boost the score's accuracy. There is a good study by Charles Schwab that supports the importance of ROE as an indicator of future dividends sustainability.

Payout ratio is another measure of dividend sustainability. Earnings based payout ratio is the more common measure, but Dividend to FCF Ratio is another, equally logical measure. Some contend that it is an even more accurate measure, since the standard payout ratio uses earnings, which includes non-cash items such as depreciation, goodwill and intangible asset write-downs. Also, earnings can be artificially boosted by aggressive revenue recognition or by under-reporting expenses. But FCF is not susceptible to these issues since it represents the cash that the company is able to generate after disbursing the money required to maintain or expand its asset base.

So, by factoring in both the FCF payout ratio as well as the earnings payout ratio into the system we get a more accurate picture of a company's quality of earnings. Additional metrics are under examination and I will be introducing them into future versions of the system.

I've also expanded my sources of data. The four DGRs for 1-, 3-, 5-, and 10-year periods and the $ dividend amount continue to come from David Fish's invaluable CCC List. The rest of the data come from various sources, including Google Finance, TD Ameritrade, Yahoo Finance, Morningstar, etc. I've tried to use the most reliable sources, and where data was unavailable at one source I obtained it from another.

I described the original methodology and formulas used in arriving at the Potency Score in the article I referenced above. However, in the new version I have practically redone all of the formulas. To give you an idea of how each metric affects the score, here I describe the new formula for one of the metrics -- the payout ratio, PR. It contributes up to two points to the score for a near zero PR and deducts as much as 3.5 points for a PR of 200. So, with a theoretical PR of zero, it contributes the maximum 2 points, and from there it gradually but with a growing acceleration heads down. At a PR of 80 the contribution is down to zero, and after that it goes negative and accelerates downwards. If you graph this movement, it very roughly looks like the lower right segment of a vertical transverse axis hyperbola. So it starts at 2 on the y axis (the vertex) and gently curves down and crosses the x axis at 80, then continues down on a steeper trajectory.

This was just for illustration, and by no means am I suggesting the formula used for PR is anything close to the actual hyperbola equation or the complexity-- nor would that have added any additional accuracy to the scores. In any case, clearly each metric's movement and effect on the score is very different.

Now without further ado, here are the lists.

Top Stocks For November

Data as of close 11/04/2011

Sym

%

Payout Ratio

TTM

%

ROE

5 Year

Avg.

% Proj EPS Growth

5 Year

P/E

Forward

Price/

FCF

5 Year

Avg.

% Div

Yield

Norm-

alized

DGR

Potency

Score

TEF

182.00

42.79

2.90

8.26

10.20

10.86

11.86

24.63

LMT

37.03

56.51

8.36

9.39

11.89

5.23

20.41

21.06

STRA

38.53

48.39

15.00

11.12

31.68

4.39

21.49

18.99

NPK

98.45

15.28

11.36

-33.81

8.67

11.21

18.81

RCI

48.68

24.38

11.79

11.07

20.21

3.83

22.77

18.04

PNNT

86.36

11.31

4.00

8.50

10.20

8.22

18.03

TWGP

18.29

17.05

17.00

7.81

9.93

3.20

24.61

17.05

CTL

142.17

10.98

-0.20

19.19

8.54

8.00

10.42

16.44

DRI

40.97

24.03

12.80

11.00

17.33

3.63

21.70

15.94

AZN

44.11

39.32

-0.68

6.56

10.20

5.65

15.02

15.87

MO

92.55

57.79

7.67

12.41

14.74

5.99

13.73

15.41

TGH

34.89

21.41

12.00

7.79

4.70

17.13

15.21

EOC

57.02

18.92

12.27

15.86

4.32

17.98

14.81

RTN

32.82

17.66

9.80

8.12

15.20

3.89

18.30

13.63

THG

45.91

7.42

15.00

9.12

7.81

2.91

21.90

12.92

UNS

54.60

10.02

3.00

13.33

12.99

4.56

15.02

12.79

WSO

76.51

11.49

17.62

19.31

14.51

3.95

16.68

12.38

NVS

47.46

18.83

6.06

9.84

13.56

4.19

15.63

12.27

MDP

35.75

11.19

9.67

8.72

9.61

5.68

10.89

12.04

BBL

21.32

36.75

9.10

7.52

15.62

3.15

19.29

11.76

Top 10 Popular Stocks

Sym

%

Payout Ratio

TTM

%

ROE

5 Year

Avg.

% Proj EPS Growth

5 Year

P/E

Forward

Price/

FCF

5 Year

Avg.

% Div

Yield

Norm-

alized

DGR

Potency

Score

MCD

48.14

27.31

10.06

16.21

20.52

2.98

17.15

9.67

GD

25.48

20.81

9.57

8.09

12.33

2.96

17.08

9.55

CL

44.57

99.72

9.31

15.92

21.37

2.63

18.55

9.37

YUM

39.17

127.46

12.08

16.64

24.80

2.11

21.39

9.08

ABT

54.60

22.27

9.80

10.49

16.11

3.60

12.93

8.78

KMB

64.26

33.64

8.00

13.18

15.90

4.02

11.30

8.77

MSFT

23.28

43.80

10.92

8.42

15.87

3.05

15.26

8.70

JNJ

52.43

27.13

6.17

12.15

14.52

3.56

12.85

8.62

T

51.79

12.48

4.26

11.68

13.73

5.90

5.32

8.54

PEP

49.89

36.36

7.50

13.39

22.77

3.32

13.08

8.18

Source: Dividend Growers With The Highest Potency Score For November

Additional disclosure: I may initiate a long position in one or more of the stocks discussed over the next 72 hours.