What Is the Dividend Discount Model (DDM)?

The dividend discount model (DDM) is used by investors to measure the value of a stock. It is similar to the 澳洲幸运5官方开奖结果体彩网:discounted cash flow (DFC) valuation method; the difference is that DDM focuses on 澳洲幸运5官方开奖结果体彩网:dividends while the DCF focuses on cash flow.

For the DCF, an investment is valued based on its future 澳洲幸运5官方开奖结果体彩网:cash flows. DCF analysis assesses the value of a company today based on projections of how much money it will generate in the future. A DCF analysis uses a 澳洲幸运5官方开奖结果体彩网:discount rate to find the澳洲幸运5官方开奖结果体彩网: present value of a stock. If the value calculated through DCF is higher than the cu෴rrent cost of the investment, the investor will consider the stock an opportunity.

For the DDM, future dividends are worth less because of the 澳洲幸运5官方开奖结果体彩网:time value of money. Investors use the DDM to price stocks based on the sum of future income flows from dividends using the 澳洲幸运5官方开奖结果体彩网:risk-adjಌusted requಌired rate of return.

Under🉐standing the Dividend Discount Model (DDM)?

Investors can use the 澳洲幸运5官方开奖结果体彩网:dividend discount model (DDM) for stocks that have just been issued or that have traded on the 澳洲幸运5官方开奖结果体彩网:secondary market for years. There are two circumstances when DDM is practically inapplicable: when the stock does n🉐𒊎ot issue dividends, and when the stock has an unusually high growth rate.

Each common share of a company represents an equity claim on the issuing corporation's future cash flows. Investors can reasonably assume that the present value of a 澳洲幸运5官方开奖结果体彩网:common stock is the present value of expected future cash flows. This is the 澳洲幸运5官方开奖结果体彩网:basic premise of DCF analysis.

The DDM assumes that dividends are the relevant cash flows. Dividends represent income received without loss of asset (selling the stock for capital gains) and are comparable to 澳洲幸运5官方开奖结果体彩网:coupon payments from a bond.

Special ♉Considerations for the Dividend Discount Model (DDM)

Although DDM advocates believe that, sooner or later, all firms will pay dividends on their common stock, the model is much more difficult t✃o use without a benchmark dividend history.

The formula for using DDM is most prevalent when the issuing corporation has a track record of dividend payments. It's incredibly difficult to forecast when, and to what extent, a non-dividend-paying firm will begin distributing dividends to shareholders.

澳洲幸运5官方开奖结果体彩网:Controlling shareholders have a much stronger sense of control over other forms of🌃 cash flow so that the DCF met💫hod might be more appropriate for them.

A stock that grows too quickly will end up distorting the basic 澳洲幸运5官方开奖结果体彩网:Gordon-Growth DDM formula, possibly even creating a negative 澳洲幸运5官方开奖结果体彩网:denominator and causing a st❀ock's value to read negative. Other DDM methods may help to mitigate this problem.