Dividend Discount Model - DDM

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DEFINITION of 'Dividend Discount Model - DDM'

A procedure for valuing the price of a stock by using predicted dividends and discounting them back to present value. The idea is that if the value obtained from the DDM is higher than what the shares are currently trading at, then the stock is undervalued.

 

Dividend Discount Model (DDM)

INVESTOPEDIA EXPLAINS 'Dividend Discount Model - DDM'

This procedure has many variations, and it doesn't work for companies that don't pay out dividends. For example one variation is the supernormal dividend growth model which takes into account a period of high growth followed by a lower, constant growth period. The principal behind the model is the net present value of the cash flows. To get a growth number, one option is to take the return on equity (ROE) and multiply it by the retention ratio (which is 1-the payout ratio).

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RELATED FAQS
  1. What are the drawbacks of using the Dividend Discount Model (DDM) to value a stock?

    Drawbacks of using the dividend discount model (DDM) include the difficulty of accurate projections, the fact that it does ... Read Full Answer >>
  2. How do I find the information needed for input into the Dividend Discount Model (DDM)?

    Analysts and investors should utilize a company’s financial statements, stock information websites and any number of analysis ... Read Full Answer >>
  3. What does the Dividend Discount Model (DDM) show an investor about a company?

    The dividend discount model, or DDM, is not designed to be used in forecasting any possible capital gains from increases ... Read Full Answer >>
  4. How does the required rate of return affect the price of a stock, in terms of the ...

    First, a quick review: the required rate of return is defined as the return, expressed as a percentage, that an investor ... Read Full Answer >>
  5. How can the price of a stock change on the ex-dividend date?

    An investor looking for a dividend-paying stock has two important dates to consider when investing in a company. The first ... Read Full Answer >>
  6. How is the ex-dividend date for a dividend on a stock determined?

    The ex-dividend date is actually determined by the appropriate stock exchange, not by the company paying the dividend. The ... Read Full Answer >>
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