Recently, Djerriwarrh held a shareholder meeting in Melbourne where our portfolio managers discussed our investment strategies, how we handle market volatility, and where we see opportunities. The session included a Q&A with our shareholders.
This article highlights the key questions and answers from Djerriwarrh portfolio manager Brett McNeill, highlighting our approach to long-term investing and adapting to market conditions.
Can you explain how Djerriwarrh achieves its enhanced franking yield?
Djerriwarrh's primary objective is to deliver a fully franked dividend yield exceeding the ASX 200 by approximately 100 to 150 basis points providing investors with an attractive income stream. We also look to achieve a strong total return, balancing income generation with capital growth.
We utilise two primary income sources to achieve enhanced yield – dividend income from quality stocks, which provide a steady stream of income, and option income, our key differentiator. Primarily, we sell call options but selectively use put options as well. Selling these option positions generates option premium income, which supplements the dividend income and boosts our overall income to support the higher dividend yield.
Which sectors do you currently see the most opportunities in?
The composition of the share market is constantly evolving, with new technology players emerging alongside traditional sectors like banking. The types of businesses we look at might have changed, but the way we invest has not. We focus on identifying quality companies with long-term growth potential across all sectors. Given current valuations, the energy and telecommunications sectors have been on our radar.
In the telecommunications sector, we have made significant investments in Telstra. Telstra’s robust infrastructure, strong market position, and ongoing efforts to expand its 5G network and digital services present a promising long-term growth opportunity. Despite short-term market fluctuations, we believe Telstra's strategic initiatives will drive sustainable growth and deliver consistent returns for our shareholders.
Additionally, we view the energy sector favorably despite its underperformance over the last 12 months. With new projects being harder to commission, the supplier response is more constrained. Combined with a high oil price of $65 per barrel, we anticipate higher oil prices over the next five to ten years. This outlook underpins our recent investment in Woodside. Their strengthened balance sheet post-merger with BHP Petroleum positions them to generate significant cash flow, potentially translating into higher shareholder dividends.
We also added to our BHP holdings during the recent period of share price weakness, which presented a buying opportunity. We previously viewed BHP’s proposed acquisition of copper assets from Anglo American as strategically sound. While the deal fell through, we see potential in the copper market, which has seen a shortage but remains attractive due to the role it plays in the energy transition and AI revolution. We anticipate stable dividends from our current holdings,with no significant dividend growth expected in the next two to three years due to projected softening in iron ore prices.
The banking sector also offers stability with good consistent dividends. The May bank reporting season saw a slightly better than expected performance, with stable dividends and no significant rise in bad debt levels. While we don't anticipate substantial dividend growth in the next two to three years, the sector provides attractive yields at the right price.
How do different companies approach capital returns, and what is your perspective on this?
Dividend strategies vary across sectors. Banks, with their strong balance sheets and low bad debt concerns, are prioritising capital return through high dividends and share buybacks. Resources companies, particularly BHP, Rio Tinto, and Woodside, are also offering healthy dividends, although these may fluctuate more due to commodity price swings. These companies are striking a balance between shareholder returns and reinvestment, avoiding the pitfalls of past excessive reinvestment.
While we value high-yielding stocks, we also recognise the importance of capital growth potential. We invest in a mix of companies, including those reinvesting for future growth and established dividend payers like Wesfarmers, though their current low yields reflect their strong share price performance. Our focus remains on identifying companies with potential to deliver strong returns, encompassing both income and capital appreciation.