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CSL proves yield chasers shouldn’t forget about growth

CSL (ASX: CSL) is a $31 billion healthcare company that develops and manufactures a range of life-saving products including vaccines and blood plasma-derived therapies. With a trailing dividend yield of just 1.5%, CSL is certainly not a go-to stock for yield hungry investors.

So CSL is not a ‘yield stock’. Fellow healthcare company Ramsay Health Care (ASX: RHC), an owner and operator of private hospitals both domestically as well as in Asia and Europe, is also not a ‘yield stock’ given that it trades on a skinny 1.8% dividend yield.

What these two companies are is ‘growth stocks’. Over the past 12 months CSL and Ramsay have seen their share prices soar by around 62% and 55%, respectively. This compares with the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO), which is up about 16%.

For comparison, take a look at Telstra (ASX: TLS) and Westpac (ASX: WBC). Both Telstra and the major banks have been very much the go-to for investors intent on securing a dividend yield higher than what they can receive from a bank account. In Telstra’s case, that juicy trailing dividend yield is around 6%, while Westpac’s is currently over 6%.

These yields are indeed better than what most high interest bank accounts offer. However, by choosing to own shares, investors take a risk. Taking a little risk is certainly not a bad thing, but investing in the stock market creates a level of risk that is distinctly different from placing your savings in a government-guaranteed interest-bearing bank account. The major risk an investor in the share market takes is the risk of loss of capital. The flip side of this risk is the potential reward from a capital gain.

As it turns out, investors in Telstra and Westpac enjoyed robust capital gains over the past 12 months — Telstra shot up around 28%, while Westpac was up over 30%. These are impressive returns compared with the S&P ASX/200 but the total shareholder returns – change in share price plus dividend distributions – still trails CSL and Ramsay’s performance considerably.

Foolish takeaway

Investors should consider the expected total shareholder return, not just dividends alone, as otherwise they are not giving attention to the risks (or potential rewards) and hence the total valuation of the company.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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