One of the key components in the Company’s ability to pay a high yield is its approach to selling options over part of its investment and trading portfolio. This generates current income from the option premium Djerriwarrh receives for selling the options.
The amount that the Company receives from selling options depends on a number of factors:
- level of volatility in share price anticipated for the underlying stock
- level of the option exercise price and particularly how far it is from the current share price.
- time to expiry, i.e. how far the option has to run.
- level of interest rates, the lower interest rates are, other things being equal, the lower the option premium received.
- the percentage of the portfolio over which we are prepared to sell options.
In an environment where the Company believes the market is more likely to rise, then we would tend to have a lower level of the portfolio covered by options to give the company more exposure to any lift in the capital value of our investments.
The majority of options are written against securities held in Djerriwarrh’s investment portfolio.
However in the investment portfolio, Djerriwarrh does not sell options with the objective of sale of the underlying shares. It is our preference for the options to either lapse at expiry or prior to exercise to seek to buy the options back and sell new options further out and preferably at a higher exercise price. From time to time, where the share price increases strongly, we do take decisions to allow the shares to be exercised when we have formed the view that it is in the shareholders’ best interest to allow that to occur. Gains on disposals of investments upon the exercise of such options, after applicable tax, are taken to the Asset Realisation Reserve. These gains are available for distribution to shareholders.
In the trading portfolio (which usually comprises between 5 to 10 percent of the total portfolio) options are written as part of the strategy to sell or close out securities for a short-term profit.
The chart below highlights the relative yield on Djerriwarrh shares and net tangible assets in comparison to cash rates and S&P/ASX 50 Leaders Index since listing. It should be noted these yields do not take into account the franking benefits available to investors.
Dividend Yield vs Market Yield