The Role of REIT Dividend Policy on Ex-Ante Portfolio Allocation

To test the diversification benefits of REIT sub-groups formed based on dividend payout ratios, we forecast ex-ante variance-covariance matrices usinga rolling window correlation and a DCC model. Regression-based mean-variance spanning tests, mean-variance efficient frontiers, and a minimum variance portfolioallocation approach using ex-ante optimization frameworks are considered. A major finding of the current study is the dividend payout ratios of REITs affectREIT market diversification benefits. Apart from extending stock market index investors’ investment universe and providing more efficient (higher profitabilityand/or lower risk) portfolios, REITs offer diversification benefits directly related to dividend policies. A unique level of diversification is attained byclassifying REITs based on their dividend payout ratios. As well, these REIT sub-groups are capable of left-shifting the efficient frontier of a market portfoliowith either of the REIT sub-groups.