Dividend Discount Model - DDM

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What is the 'Dividend Discount Model - DDM'

The dividend discount model (DDM) is 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)

BREAKING DOWN '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 does the Dividend Discount Model (DDM) show an investor about a company?

    Discover the purpose of the dividend discount model, or DDM, of stock analysis and what it specifically aims to evaluate ... Read Answer >>
  2. How do I find the information needed for input into the Dividend Discount Model (DDM)?

    Learn where analysts and investors can find the three pieces of necessary information that allow them to calculate the dividend ... Read Answer >>
  3. How is perpetuity used in the Dividend Discount Model?

    Learn about how the concept of a stock perpetuity is used in the basic dividend discount model, which is also known as the ... Read Answer >>
  4. Why is the Gordon Growth Model not more widely used?

    Learn why the Gordon growth model is not more widely used in valuing the stock price of a company. Understand its inefficiencies ... Read Answer >>
  5. What can cause the marginal propensity to consume to change over time?

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