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
SPDR S&P 500
National Presto Industries
Textainer Group Holdings
Strayer Education, Inc.
Lockheed Martin Corp.
Tower Group, Inc.
NACCO Industries, Inc.
Top 10 Average:
Darden Restaurants, Inc.
Empresa Nacional de Elec.
Meridian Bioscience Inc.
Altria Group, Inc.
UniSource Energy Corp.
Top 20 Average:
BHP Billiton plc
Broadridge Financial Sol.
BHP Billiton Ltd
Leggett & Platt, Inc.
Hanover Insurance Group
Top 30 Average:
Additional disclosure: I may initiate a long position in any of the stocks or funds discussed over the next 72 hours.