Dividend Discount Model

Knowledge Center

What is the Dividend Discount Model? Meaning.

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.

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

Return to Management Hub: Decision-making & Valuation  |  Finance & Investing

More on Management  |  Return to Management Dictionary  | 

This ends our Dividend Discount Model summary and forum.