Performance Results Of The Potency Score System

The Potency Score System was first introduced on October 16, 2011. Its objective is to forecast and rank dividend growth stocks according to their long term dividend return. The system's top picks have been published here on a monthly basis since last October and will continue to be published.

Although a period of 3-4 months is a very short time to judge the performance of a long term dividend growth stock portfolio, I think it is still worthwhile and could be instructive. So I intend to publish the performance of the monthly lists on a quarterly or bi-annual basis.

Before getting to the results, let me give a brief overview of the system for those unfamiliar with it. The system is a methodology that applies a multitude of fundamental data and metrics and their interrelations to calculate and assign a Potency Score to each dividend stock, thereby producing a ranked list of stocks. Empirical data as well as theoretical concepts have been utilized throughout the system.

The Potency Score

The Potency Score is a measure of the long term dividend return potential of a company. It encapsulates a company's most important fundamental metrics into a single rating, allowing easy comparison between companies. The higher the score, the higher the long term dividend returns. A good way to get a feel for the Potency Score is to view it as a relative forecast of a stock's seven-year yield-on-cost.

The system's picks tend to be companies that have been paying dividends for many consecutive years and consistently increasing it. Since sustaining and growing dividends requires earnings growth, these companies tend to produce respectable capital gains as well.

The system's methodology has been continuously evolving and the latest version has little resemblance to its initial version.

For those who prefer a less hands-on investment approach I have published another equities investment strategy using Exchange Traded Funds instead of individual stocks, named The Immortal Portfolio,

Performance Results For The Original List

The initial introduction of the system was in October 2011. Below is the performance of the top ten, top twenty, and top thirty stocks from that original list. The top ten beat S&P 500 Index (SPY) by 3.61% (14.07% to 10.46%) in about three and a half months, which is the period since the list's inception. This is clearly a fantastic result.

If we weren't dragged down by TEF's terrible performance, we would have outperformed the market by an even greater margin. The top 20 outperformed the market by 0.70%. Even the top 30 beat the market, albeit by a mere 0.52%. But we know how hard it is to beat the indexes.

So Far So Good

Although our main objective is long term dividend growth and not market outperformance for capital gains, it is nice to see that not only the system's picks were stocks with well above average dividend yields and respectable dividend growth rates, they also outperformed the S&P 500 Index in terms of capital gains and total returns as well.

But it's way too soon to celebrate. Our goal is the long term growth of dividends, and a good measure by which to judge that would be the yield-on-cost. Any other suggestions by readers for performance tracking are welcomed. I will keep posting performance updates for this and the more recent lists on a regular basis and over time, together with the readers, we will find out to what degree the system can stand the test of time.

Below is the tabulation of the performance of the list's top 30 stocks and average returns for the top 10, top 20, and top 30. The original stock list was produced using the closing data for the week ending Friday, October 14, 2011.

Top 30 Stocks From The Original List

Data source: Yahoo! Finance adjusted closing prices for dates shown

Name	Symbol	$ Price 10/14/2011	$ Price 02/03/2012	% Change
SPDR S&P 500	SPY	121.80	134.54	10.46%
Telefonica	TEF	20.24	17.70	-12.55
National Presto Industries	NPK	95.96	102.06	6.36
PennantPark Investment	PNNT	9.85	10.60	7.61
CenturyLink	CTL	33.92	37.40	10.26
Textainer Group Holdings	TGH	24.21	31.67	30.81
Strayer Education, Inc.	STRA	86.82	118.49	36.48
Lockheed Martin Corp.	LMT	75.02	84.59	12.76
Tower Group, Inc.	TWGP	22.54	22.38	-0.71
NACCO Industries, Inc.	NC	73.06	102.22	39.91
Rogers Communication	RCI	35.45	38.91	9.76
		Top 10 Average:		14.07%
Darden Restaurants, Inc.	DRI	46.22	48.52	4.98
Empresa Nacional de Elec.	EOC	43.82	50.39	14.99
Astrazeneca plc	AZN	47.62	47.50	-0.25
Raytheon	RTN	42.40	48.97	15.49
Hasbro, Inc.	HAS	34.19	35.86	4.88
Meridian Bioscience Inc.	VIVO	16.42	18.62	13.40
Watsco, Inc.	WSO	58.01	71.74	23.67
Shaw Communications	SJR	20.76	19.74	-4.91
Altria Group, Inc.	MO	27.30	28.84	5.64
UniSource Energy Corp.	UNS	36.62	38.32	4.64
		Top 20 Average:		11.16%
Safeway Inc.	SWY	17.54	21.74	23.95
BHP Billiton plc	BBL	62.30	69.96	12.29
Greif Inc.	GEF	46.61	51.17	9.78
Broadridge Financial Sol.	BR	21.44	24.49	14.23
Southside Bancshares	SBSI	19.45	22.25	14.40
Harris Corporation	HRS	34.19	35.86	4.88
Avista Corporation	AVA	24.66	25.80	4.62
BHP Billiton Ltd	BHP	77.70	82.15	5.73
Leggett & Platt, Inc.	LEG	21.76	23.22	6.71
Hanover Insurance Group	THG	34.13	37.43	9.67
		Top 30 Average:		10.98%

Disclosure: I am long TEF, CTL, STRA, LMT, RCI, AZN, SJR.

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