If all you care about is yield – buy Telstra Corporation Ltd not the banks

Not all blue-chips are created equally and when it comes to a rock-solid stock, Telstra is far better than the banks.

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The recent sell-off in the shares of Australia and New Zealand Banking Group (ASX: ANZ) after the release of the bank’s half-yearly earnings result shows that despite reporting an outstanding profit which included big growth numbers from its Asian operations, and a 14% increase in its interim fully franked dividend, investors appear to be concerned that all the good news is already priced in.

Given Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB) are both due to report their interim results on 5 and 8 May respectively, there is a fair chance that a similar fate may await them too.

With ANZ, Commonwealth Bank of Australia (ASX: CBA) and Westpac all trading near record highs there is definitely reason for shareholders to be concerned about the outlook for bank stocks from here. Given many investors own the banks for their appealing fully franked dividend yields, it is concerning that some investors may not be paying due attention to the risks which are involved with owning banks, or with regard to a conservative assessment of their value.

In other words: This chase for yield has pushed some stocks – particularly the banks perhaps -to arguably expensive levels, above what a conservative estimation of their valuation would suggest is a reasonable price to pay.

If you are an income seeking investor, attracted to a bank stock because of its yield then ask yourself whether you wouldn’t be better off owning Telstra Corporation Ltd (ASX: TLS)? Telstra offers both a high and maintainable fully franked dividend yield, yet with significantly less risk than its fellow high-yielding blue-chip peers.

Even if your primary focus is income, investing in equities involves not just an income component but also a capital gain or loss component. The worry is that investors have been focussing too greatly on the income (ie. dividend yield) aspect and not enough on the potential for capital loss aspect in their portfolio.

This risk is elevated when an investor does not have a thorough understanding of the underlying investment and when it comes to the risk profile of a bank, it doesn’t get much more difficult to understand! They are highly leveraged vehicles with complex liabilities. In contrast Telstra has an incredibly solid balance sheet and is much less exposed to potential financial shocks.

Foolish takeaway

In the current economic climate which has seen the Reserve Bank of Australia drop the cash rate to an all-time low of 2.5%, investors have been clamouring for equities that pay high and maintainable dividend yields to provide them with income.  While it is understandable that investors want higher income, a tunnel vision focus on yield without due consideration of the potential for capital loss has significant risks.

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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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