Definition – What is the Dividend Discount Model?
The DDM (Dividend Discount Model) is a stock valuation method using the present value of future cash flows (such as dividends).
Formula – How to calculate Dividend Discount Model
Dividend Discount Model = Dividends per Share / (Discount Rate – Dividend Growth Rate)
A stock has dividends per share of $1.50. The discount rate is 3.25% and the dividend growth rate is 2.75%.
Dividend Discount Model = $1.50 / (0.0325 – 0.0275) = $1.50 / 0.005 = $300
Therefore, the dividend discount model is $300.
Sources and more resources
- The Motley Fool – What is the Dividend Discount Model? – The formula for dividend discount model and some example calculations.
- Wikipedia – Dividend discount model – The formula for dividend discount model and how it is calculated.
- Wall Street Mojo – Dividend Discount Model – Complete Beginners Guide – An explanation for how to use the dividend discount model.
- Investopedia – Dividend Discount Model – DDM – A full explanation of the dividend discount model.