Measuring Corporate Dividend Risk Using a Monte Carlo Simulation Model

Abstract

Investors have long used historical stock prices to evaluate future returns, as well as the risk associated with the estimated returns. In this paper, we propose a method for evaluating risk based on historical dividend payments. We develop a Monte Carlo simulation to generate future dividends and calculate the mean internal rate of return. We apply data analytical techniques to model estimates and use them to define a dividend risk ratio. We conclude that the newly defined dividend risk ratio provides essential information to dividend investors and is a useful tool in portfolio management.