Multistage Dividend Discount Model


DEFINITION of 'Multistage Dividend Discount Model'

An equity valuation model that builds on the Gordon growth model by applying varying growth rates to the calculation. Under the multistage model, changing growth rates are applied to different time periods. Various versions of the multistage model exist including the two-stage, H, and three-stage models.

BREAKING DOWN 'Multistage Dividend Discount Model'

The two-stage model has an unstable initial growth rate, and can be either positive or negative. This initial phase lasts for a specified time and is followed by stable growth which lasts forever. The problem with this model is that the growth rate from the initial phase is assumed to change to the stable growth rate overnight.

The H-model has an initial growth rate that is already high, which then declines to a stable growth rate over time. This model assumes that a company's dividend payout ratio and cost of equity remains constant, which is its biggest downfall.

Finally the three-stage model has an initial phase of stable high growth that lasts for a certain period. In the second phase the growth rate declines linearly until it reaches the a final stable growth rate. This model improves upon both previous models and can be applied to nearly all firms.

  1. Equity Risk Premium

    The excess return that investing in the stock market provides ...
  2. Dividend

    A distribution of a portion of a company's earnings, decided ...
  3. Discount Rate

    The interest rate charged to commercial banks and other depository ...
  4. Dividend Aristocrat

    A company that has continuously increased the amount of dividends ...
  5. Undervalued

    A financial security or other type of investment that is selling ...
  6. Dividend Discount Model - DDM

    A procedure for valuing the price of a stock by using predicted ...
Related Articles
  1. Fundamental Analysis

    Discounted Cash Flow Analysis

    Find out how analysts determine the fair value of a company with this step-by-step tutorial and learn how to evaluate an investment's attractiveness for yourself.
  2. 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.
  3. Fundamental Analysis

    Why Dividends Matter

    Seven words that are music to investors' ears? "The dividend check is in the mail."
  4. Investing Basics

    What Does In Specie Mean?

    In specie describes the distribution of an asset in its physical form instead of cash.
  5. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  6. Mutual Funds & ETFs

    How to Find Mutual Funds With High Dividends

    Learn about the important factors to consider when looking for mutual funds that pay high dividends, including how they may impact your taxes.
  7. Investing

    What is Cumulative Preferred Stock?

    Cumulative preferred stock is a type of stock that stipulates any skipped or omitted dividends must be paid to its holders before common shareholders can receive dividends.
  8. Stock Analysis

    Exxon Mobil Stock: A Dividend Analysis

    Learn about Exxon's strong history of paying and growing dividends. Understand how the company's revenues are hurt by low commodity prices.
  9. Stock Analysis

    Schlumberger Vs. Halliburton Stock: Which One to Choose?

    Read about the differences between Schlumberger and Halliburton, two large companies that operate in the oilfield services sector.
  10. Stock Analysis

    AT&T Stock: A Dividend Analysis

    Discover analysis of AT&T dividend policies, and explore the dividend policies of its main competitors, China Mobile Limited and Verizon Communications.
  1. What are the advantages and disadvantages of the Gordon Growth Model?

    The Gordon Growth Model, also known as the dividend discount model, measures the value of a publicly traded stock by summing ... Read Full Answer >>
  2. How often do mutual funds pay capital gains?

    The frequency with which mutual funds pay capital gains varies. However, funds that generate a profit within a given year ... Read Full Answer >>
  3. Can dividends be paid out monthly?

    Though it is more common for dividends to be paid quarterly or annually, some stocks do pay monthly dividends. Dividends: ... Read Full Answer >>
  4. Are dividends considered an asset?

    Whether dividends paid on stock are considered an asset depends on which role you play in the investment: the issuing company ... Read Full Answer >>
  5. Are dividends considered passive or ordinary income?

    Despite the fact that earning dividends requires no active participation on the part of the shareholder, they do not meet ... Read Full Answer >>
  6. Is dividend income taxable?

    Dividend income is taxable but it is taxed in different ways depending on whether the dividends are qualified or nonqualified. ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  2. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  3. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  4. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  5. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
  6. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!