Dividend Discount Model

From Bogleheads

Dividend Discount Model

A way of valuing a company based on the theory that a stock is worth the discounted sum of all of its future dividend payments. Dividend discount models are used to determine if a stock is a good buy (selling at a lower current price than indicated by the model) or a bad buy (selling at a higher current price than indicated by the model).

The value of a stock is worth all of the future cash flows expected to be generated by the firm, discounted by an appropriate risk-adjusted rate. According to the model, dividends are the cash flows that are returned to the shareholder.

Over the long term, the stock price can be modeled as:

Current Stock Price = Div / (r - g)

• where Div is the current dividend / year
• r is the rate of return
• g is the expected growth rate

Links

• Definitions of dividend discount model on Google
• Digging Into The Dividend Discount Model (from Investopedia)
• Dividend Discount Model on Wikipedia

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