A Dividend Discount Model Calculator
The dividend discount model (DDM) is a stock valuation approach that discounts future predicted dividends to a present value to arrive at the intrinsic value of a stock. The DDM is often used by value investors who look for a DDM value that exceeds the current stock price in order to identify an undervalued stock. It is important to note that the dividend discount model provides a way for investors to estimate the value of a stock and that the value the model provides is only as reliable as the input data.
Calculate the Dividend Discount Model Value
The formula for the dividend discount model can be written as:
The DDM is considered to be a more conservative approach to stock valuation than the discounted cash flow (DCF) model, which relies on future cash flow projections.
The Discount Rate and the Time Value of Money
In order to fully understand the DDM approach to stock valuation, an investor should become familiar with a financial concept known as the time value of money, which simply says that a dollar is worth more to you today than at some point in the future. This is because any dollar you hold today can be invested and provide compounded returns. Not receiving that dollar today leads to opportunity costs. So the discount rate you assign as part of the DDM valuation process is expressed as an annual percentage and is the interest rate you choose to bring future cash flows down to a present value.
Estimating the Dividend Growth Rate
As a company’s dividend payments to investors grow over time, shareholders enjoy a greater stream of revenue and the probability of an increase stock price (since the stock becomes more attractive to investors as it offers greater income). The dividend growth rate for a company can be estimated with a few pieces of company financial data.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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