Multistage Dividend Discount Model

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Dividend

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

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

    A company that has continuously increased the amount of dividends ...
  4. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based ...
  5. Overvalued

    A stock with a current price that is not justified by its earnings ...
  6. Undervalued

    A financial security or other type of investment that is selling ...
RELATED FAQS
  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 >>
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. Mutual Funds & ETFs

    How To Build A Bond Ladder?

    Bond laddering is a strategy used when building a portfolio: an investor can spread out interest rate risk and create a stream of cash flows for income.
  5. Economics

    What is the Income Effect?

    In economics, the income effect is the change in the consumption of goods caused by a change in income, whether income goes up or down.
  6. Investing Basics

    What is Treasury Stock?

    Treasury stock is a company’s own stock that it holds in its treasury for later use.
  7. Retirement

    How To Move From Nest Egg To Income?

    Income vs. a nest egg is closely tied to what most of us are ultimately interested in for retirement – maintaining our standard of living and to travel.
  8. Stock Analysis

    Is This Dividend Stock A Value Or Value Trap?

    We can say that Fifth Street Finance has had a rough year, but there's a huge difference between an undervalued stock and a stock that's cheap for a reason
  9. Stock Analysis

    Is Intel's Newly Raised Dividend At Risk?

    Intel recently raised its dividend from $0.90 per share on an annualized basis to $0.96 after failing to raise the dividend during 2013 and 2014.
  10. Stock Analysis

    Is This High-Yielding Dividend Stock A Buy?

    After it's fallen 38% in the past 12 months, even as the S&P 500 continued to rise, now is a good time to look at Las Vegas Sands' stock.

You May Also Like

Hot Definitions
  1. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  2. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  3. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  4. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  5. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
  6. Absorption Costing

    A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption ...
Trading Center