Expected and realized returns for dividend-targeting investors: CAPM-DDM conceptual framework using Australian REITs

Abstract In this study, a simple theory-based framework is developed to show the relationship between expected and realised returns on stocks by dividend-oriented investors. The framework shows that the expected returns of investors on individual securities cause changes in security prices in the actual market, and that the returns realised due to price changes are determinants of the expected returns in the following period. The framework uses the capital asset pricing model (CAPM) and the dividend discount model (DDM). The study identifies the relationship between four indicators: β, which indicates the risk of fluctuations in individual securities relative to the market portfolio; expected returns; security prices; and realised returns. After presenting the framework, a fixed-effects regression analysis of the relationship between the four indicators presented in the framework is conducted using data from nine Australian REITs over a 20-year period from 2005 to 2024. The results of the empirical study show that the relationship between the four indicators is consistent with the framework. The novelty of this study lies in the fact that it combines two theories constructed from different perspectives—CAPM and DDM—and explicitly shows the relationship between expected and realised returns.