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.
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 1the payout ratio).
VIDEO
Loading the player...
RELATED TERMS

Dividend
A distribution of a portion of a company's earnings, decided ... 
Discount Rate
The interest rate charged to commercial banks and other depository ... 
Dividend Aristocrat
A company that has continuously increased the amount of dividends ... 
Undervalued
A financial security or other type of investment that is selling ... 
Overvalued
A stock with a current price that is not justified by its earnings ... 
Valuation
The process of determining the current worth of an asset or company. ...
RELATED FAQS

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 >> 
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 >> 
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 >> 
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 >> 
How does a company decide when it is going to split its stock?
There are no set guidelines or requirements that determine when a company will split its stock. Often, companies that see ... Read Full Answer >> 
Which insurance companies pay the highest dividends?
For income investors, finding companies that pay aboveaverage dividends consistently is key to creating and sustaining a ... Read Full Answer >>
Related Articles

Investing
Using the Dividend Discount Model
The dividend discount model is a way of applying net present value analysis to estimate the future dividends a stock will pay. Those dividends are then discounted back to their present value. ... 
Markets
Digging Into The Dividend Discount Model
The DDM is one of the most foundational of financial theories, but it's only as good as its assumptions. 
Investing Basics
How And Why Do Companies Pay Dividends?
If a company decides to pay dividends, it will choose one of three approaches: residual, stability or hybrid policies. Which a company chooses can determine how profitable its dividend payments ... 
Fundamental Analysis
The History Of The Modern Portfolio
Learn how the writings of John Burr Williams and Harry Markowitz led to the creation of the investment portfolio. 
Markets
Valuing A Stock With Supernormal Dividend Growth Rates
If these calculations are off, it could drastically change the value of the shares. 
Markets
Company Clone Cost Reveals True Value
Find out how calculating a reproduction cost for a company can beat out the dividend discount model. 
Investing Basics
How Dividends Work For Investors
Find out how a company can put its profits directly into your hands. 
Investing
The Strong Dollar’s (Real) Toll On Tech Stocks
A large portion of U.S. technology companies’ sales occur overseas, given the strong international business and consumer demand from many U.S. tech firms. 
Mutual Funds & ETFs
Why You May Want To Be (And Stay) In Bonds
Bonds are complicated, and it’s easy to feel intimidated or confused. Fortunately, you don’t need to be a numbers geek to be an informed investor. 
Economics
The Big Chill: What’s Wrong With The U.S. Consumer
Based on the most recent April data, investors may, once again, be disappointed when the secondquarter gross domestic product (GDP) report comes in.