Dividend Discount Model

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Description of Dividend Discount Model. Explanation.

 

Definition Dividend Discount Model. Description.


The Dividend Discount Model is a valuation technique that estimates the price a stock will be trading by calculating the Net Present Value of all expected future dividend payments discounted by an appropriate risk-adjusted rate.


Two well-known variants of this model are:

  • Stable model. Best suited for firms experiencing long-term stable growth, the model assumes the firm grows at a rate equal to the long-term nominal growth rate of the economy (inflation plus real growth in GDP).

  • Two-stage model. Assumes that the company will experience a period of high-growth followed by a decline to a stable growth period.

Both variants are very sensitive to the assumptions made regarding growth rates, time frame, and the required rate of return.


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Compare with: Net Present Value  |  Discounted Cash Flow  |  Dividend Payout Ratio

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