The Randomness in Dividends
This past year has been a fun and interesting one. It's kind of unsuspecting to think a guy who has his Masters in Real Estate would be more interested in topics on randomness, freakonomics, and quantitative valuations than real estate properties and JV waterfalls. The reasoning behind my interests in these topics is because of the complexity and my prior failures at my other financial models. To be frank, the valuation models I planned to sell online were utter garbage due to their lack of taking into account market anomalies, random events, and soundness.
While figuring out how to make my models, I came across a book called Fooled by Randomness by Nicolas Taleb the Quant Trader who coined the phrase "Black Swan". He spoke about the randomness in everyday things and how we as humans overlook the anomalies and are overconfident in our abilities in industries subject to randomness. Things change each and everyday, almost everything in the world is subject to change and comes in random intervals. This is particularly relevant in the stock market as investor sentiments towards a stock changes, company's implement new strategies that may change the course of the company's fortune, or a company may cut their dividend next year to offset losses just to name a few. Everything is subject to change when your dealing with investing in securities. Nobody can consistently predict accurately where things will be in the next year, however, there is a way for us to get a good idea on where things may be based on past data through the Monte Carlo Simulation. As you should know I believe consistent dividends should be the goal for every investment you go in so my approaches are all dividend investor based. As I like to do I started tinkering around with stuff in Excel and thought why not mix it different valuation concepts together and see what happens which brought the Dividend Discount Monte Carlo Simulation(DDMC). Just like stock prices move randomly, dividends also move randomly based on two main factors future dividend payments and future growth rates. So in the Monte Carlo Dividend Model I run tests on both a stocks future dividend payment and future growth rates. The reasoning behind this is because a company can randomly increase or lower their dividend next quarter this is particularly true of REIT's whom I are more subject to change due to them having to pay out 90 percent of their profits to investors in dividends. Since REIT's have to allocate 90 percent of their profits in dividends that doesn't leave them with much to invest towards buying properties and refurbishing assets to increase cash flows. So more than likely they would decrease their dividend causing dividend investors to move towards higher yielding stocks and assets. In addition, the same reasoning is true of why I tested growth rates. Of course, some well capitalized companies with large portfolios such as Simon Property, Kimco, Boston Properties, Equity Residential to name a few are able to remain strong and provide good dividends due to the breadth of high quality assets in their portfolio. This is strictly REIT based, this program allows you to instantly get stock prices past and present, randomly test future dividends and growth rates by one click of a button. Also, within it includes a static dividend discount model and Gordon Growth model. I urge you to understand that the REITNOMIC DDMC model helps give you a good idea on what you would be willing to pay based on the dividend and your required return. This is in no way the magic formula to making money in the market. All my models are strictly to provide guidance and to better equip investors.
The REITNOMIC DDMC model will be for sell at $35 on Spreesy. A lot of work and research went into making these financial models from scratch. I really enjoyed making this because it helped me expand my thinking beyond what I was suffering from which was straight line thinking. I'm really glad to make this available to people who want to make money in the market but can't afford the tools such as a Bloomberg Terminal or a valuation software from Green Street. My software is fully functional and if you have any issues you can email me at reitnomic@gmail.com. For purchase inquiries just check out the link to my Spreesy account in my profile. I hope my software provides tremendous guidance on valuing and finding undervalued REITS that provide strong dividend plays.
About the Author
Industry: Financial Services
Area of Expertise:REIT valuation and CMBS valuation
Service Region:North America
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