I am doing what in mathematics is called a first derivative. Ie the sources of return from REITs areRodc wrote:Doesn't this suppose re does not get more profitable?If the dividend yield doubled, back to historic levels of 6% say, then the price would drop to 50.
- dividend yield (initial)
- dividend growth
- the speculative return ie the price the market puts on $1 of dividends (lower yield = higher valuation, the opposite of PE)
I am fixing the first 2 factors for analysis, with a view to explaining the impact of the last factor, in effect what dividend yield the market demands long term from REITs.
Yield is down because the price of the instrument has gone up. As I say it's a first derivative, I am holding constant the other factors.If yield is down because rents are down (either per square foot when down or vacancy went up), and rents go back up, you could get a doubling of yield with no change in price. Or if folks are happy with a 3% yield they could bid prices up to $200.
(in finance a derivative security is basically a future option or swap, which is different).
In the latter, that is speculative return-- yield would drop to 1.5%.
your scenario is yield is down because the REIT cuts its payout because its profits are down. That's not the speculative return (the level of yield the market expects from the stock) that's simply its dividend growth.
The complexity with PE10 which is why Shiller uses a 10 year average is that earnings drop due to a recession, but the market does not usually drop as far (except in periods like the 1930s or 70s when the market becomes convinced things are never going to get better). So the PE rises.This would be like P/E10. It can be low because E is depressed or because E10 is high.
If REITs cut their dividends, either the REIT market cap falls to hold yield steady, or the yield itself falls, presumably in the anticipation of future recovery.
Precisely so. Ie in the long run the PE of the market should be stable (in fact it never has been, itself an interesting datum, its always going up or down)-- it's not even clear it oscillates around a long run average (if it does, that average is around 15x I believe). A safe assumption is that the long run PE of stocks, or the yield on REITs, is constant.Long term with stocks you expect speculative returns to be zero. If high or low at the starting date you might not, but in general over say a lifetime of monthly investing you would expect something around zero.
Why would this not be true for REITS?
In the case of REITs, if the long run average REIT dividend yield is 6% and we are at 3% right now, then either share prices halve from now, OR share prices go nowhere and dividend growth rises to $6 per $100 of REIT market value. In the case of stocks, that is more or less what has happened since 2000 (ie corporate earnings have recovered, but the PE of the stock market has steadily fallen-- roughly speaking from over 22x to about 15x).