Telstra and BHP Billiton are two well-known Australian stocks. Telco giant, Telstra, is known for providing investors with a high, fully-franked dividend yield, currently around 13% fully franked. While diversified miner, BHP pays a much lower dividend of 3% fully franked and has more of a growth focus.

If you had invested a sum of money into both BHP and Telstra 10 years ago, you would have expected Telstra to have provided you with a greater level of income, right?  We all know that BHP has experienced phenomenal growth over the past 10 years – but surely Telstra would have given you more income?

Well in fact the answer is no!

Let’s assume that you invested $10,000 into both BHP and Telstra around 10 years ago (January 2002). Over this period, Telstra would have provided the investor with a total income return of around $6,400 including franking credits. However, if at the same time you have invested $10,000 into BHP, it would have yielded a total income return of around $8,700.

The following table illustrates the last 10 years of dividend returns for both BHP and Telstra assuming a $10,000 investment:       

As you can see above, while Telstra would have initially generated a higher income return in the first few years, the strong earnings and share price appreciation of BHP over time results in a higher total dollar return over the last 10 year period.

This example shows that a higher dividend yield is not always a true indication of higher profits. BHP is a more growth-orientated company and retains profits to grow earnings, whereas Telstra pays out the majority of its earnings as dividends.

The above case study demonstrates a classic investment trap – that is, not to make an investment decision based solely on income return. While yield is extremely important for investors, a balanced portfolio should consider a blend of both income and growth stocks.