Success #1: Recogizing When Fees Are Too High

When I decided to open an RRSP mutual fund account, I had done some research on the different funds available from my bank. I had some in mind when I went in to open the account. I have a feeling that the representative I spoke with thought I had no idea what I was talking about when I told her I wanted to start investing. This was most likely because I still get asked if I'm over the age of 18, when really I'm 22. I don't do anything major like start an RRSP without knowing what I'm doing.

So when I went in to open the account, they didn't even ask me which fund I wanted to invest in, or give me choices. I filled out their quiz, and they said "Ok, here's what we're going to set you up with." I didn't really have a choice in the matter. Luckily, I realized that the bank would get 1.9% of the balance in my RRSP account every year. Later on when the balance is getting big, that's a lot of money to lose out of my retirement savings every year.

I discovered that my bank offers low-fee index funds, around 0.3% per year. This is a much more agreeable fee, so I applied for the funds by mail. Everything is switched over now, and my annual fees are much more under control now. I've decided that if I need to deal with the bank again, I'll do it in a more direct manner, or circumvent the representative altogether by doing things through mail or email. I'm glad I was able to recognize an unfavourable financial decision, and remedy it on my own.

Mistake #1: Didn't Do Proper Research

I have done enough trading in the stock market to do justice to a post about my first mistake in investing. The lesson learned is: "Always give a stock due diligence in research before buying."

My first ever stock purchase was of Rogers Communications Inc. My reasoning was the following: Rogers is always first out with the hottest new cell phones (iPhone, etc.), they treat their customers well, and give them free stuff every so often, their customer support isn't out-sourced (at least at the time it wasn't), they have the best network coverage in Canada, and the wireless industry in general is booming. Higher demands on wireless data transfer is necessitating further development of the wireless infrastructure. This might make sense from a general perspective, but I didn't do any fundamental analysis, technical analysis, or even cursory analysis of the stock.

I just so happened to buy the stock at a good time, and the price went up about 12% over a few months. Then in October, their Q3 financial report came out, people didn't like what they saw, sold their shares and Rogers Comm. Inc. went down about 11% in three days. I decided to sell because I was back down to almost $0 gain, and needed the money anyway.

A second example of my mistake was investing in Alamos Gold Inc. I had noticed that over the years and months before now, Alamos had gone up, up, up in price. I thought, if I jumped on now, it'll just keep on going. Lesson number two: "Don't base an investment decision on past performance." Alamos went down about 10% from when I bought it, and I decided to sell before it got worse. It was a good thing I did.

I had read these two lessons before investing anything, but apparently had to learn them the hard way. At least I'm learning from my mistakes, and I did take one lesson to heart without having to learn the hard way: "If things look bad, get out before it gets worse."

Stock Analysis: National Bank of Canada (NA.TO)

My first purchase toward my dividend growth strategy involved several considerations, but I ended up deciding on buying shares in National Bank of Canada. The following are the reasons why I decided to buy shares. Information is accurate as of October 21, 2010.

National Bank of Canada has a market capitalization of $10,979,300,000. It is part of the financial sector, meaning its main services offered are personal and business banking, and investment options. It was founded in Quebec City in 1859, and has maintained or increased its dividend per share for 18 years in a row.

Here are some quick facts:

Annual Dividend:  $2.48 per share
Dividend Yield:  3.66%
Dividend Payout Ratio:  43.68
Price/Sales Ratio:  2.54
Price/Earnings Ratio:  11.93
Graham Number:  $73.89
Beta: 0.53

The dividend yield is a good amount, and its higher than that of the S&P Composite Index at 2.58%. The dividend payout ratio is below 50, meaning that the company's earnings should be able to support dividend growth. The price/sales ratio and the price/earnings ratio are both lower than other companies in the same sector, making this stock a more valuable buy than others. The Graham Number (maximum price you should be willing to pay for a stock) is much higher than the current stock price of $66.90, which is a good indicator. A beta value of 0.53 means that the stock is about half as volatile as the overall market.

Another thing to look at is the company's earnings per share (EPS) over the past few years. A good dividend growth stock should have a continually increasing EPS to be able to grow their dividends.

This graph shows EPS from 2007 to 2010.

The EPS is a little all over the place, due mainly to the recession. I wasn't able to find EPS data before 2007. The earnings seem to be at least stable when there isn't as much economic uncertainty. However, the fact that National Bank of Canada couldn't keep earnings stable during the recession is a point against it.

So once I decided that this would make a good start for my dividend growth portfolio, I sold my shares in a dividend exchange-traded fund, and purchased a position in National Bank of Canada (NA.TO).

Disclaimer: I am not a professional investor, nor am I recommending that anyone buy this stock. Due diligence is always required when making a purchase decision.