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.

The Dividend Growth Investing Strategy

After reading several different investment strategies, I've decided to begin implementing the dividend growth strategy. This is an investment strategy where an investor purchases stocks of well-established companies that continually increase their dividend per share over a long period of time. Ideally, the investor need never sell their stocks unless a company makes dividend cuts. In order to qualify as a good dividend growth stock, a company must have a fairly long history of increasing their dividends (usually ten years in a row, or more). A good place to find a list of such companies is the S&P/TSX Canadian Dividend Aristocrats list.

This strategy is particularly effective because an investor receives dividends every quarter, and a higher dividend over time. The dividends can be used in a Dividend Reinvestment Plan to purchase additional shares, or accumulated to buy another dividend growth stock. Sometimes a stock dividend is paid out instead of cash, which is effectively a stock split. Once a good dividend growth portfolio is established, an investor simply makes money via passive income. The only downside to this strategy is that it takes time and patience.

Dividend growth stocks should fit a strict list of criteria before being purchased. A company should not pay out too much money in dividends, or it won't be able to sustain itself and use some of its cash to invest in the company's future. The company should be able to grow its earnings, and increase dividends as the earnings grow. An investor should try to hold some dividend growth stocks from each of the different sectors (eg. financial, utilities, materials, etc.)

Watch for further posts analyzing specific dividend growth stocks.

Introduction

It all started one day in August 2010, when I was looking at my bank account online, and saw a button labeled "Purchase an Investment". Before that point, I had never considered investing, especially since I had just recently witnessed what could happen when a global recession hit. Then I began to think about the student loan I'm going to have to pay back, and how I'll eventually need to buy a car, a house, and eventually eventually retire. So I clicked on the button.

All the different investment options that my bank offered came up on the screen. I Googled any terms I didn't know, and began to learn more and more about all the different investment options that are available, how they are taxed, what type of accounts they can be held in, what risks are involved, and so on. I decided to ask several people I know that invest in different things for some advice. Several people recommended I start by opening an RRSP account to start saving for retirement, and I can make use of the first-time home-buyer's clause to make a down payment on a house at some point.

I went to my bank, armed with some rudimentary knowledge of mutual funds, and a few ideas of which funds I might be interested in. When I opened the RRSP, I had to take a quiz that assessed my investment knowledge and risk tolerance. The bank basically decided for me which mutual fund I wanted, so I left it at that for a couple months. Just recently, I recognized that a mutual fund with a MER of 1.9% was actually a fairly high fee, and there were some much cheaper options available. I switched over to two different mutual funds, one with a MER of 0.48%, and the other with 0.31%.

Shortly after opening my RRSP account, I also decided to open a Tax-Free Savings Account (TFSA) with a discount brokerage so I could dabble in trading stocks. I've made a few trades over the past few months, and I plan to blog about what I learn, what I mess up on, and what successes I find.

I've done a fair amount of reading on personal investing in the past few months, and I've decided to get started on a dividend growth strategy for my TFSA account. I will elaborate more upon this strategy in further blog posts. I like the idea of the "buy-and-hold" strategy for stocks, as they generally tend to show positive returns in the long run, and dividend payments offer a way to earn passive income. I've heard nothing but bad things about day trading and trying to time the market, and I don't have the time or motivation to learn all there is to known about technical analysis to try and make that strategy work.

In writing this blog and learning more about personal investment, I hope to be able to accomplish my long-term financial goals, and end up with a nice portfolio for retirement.