Series 65: Dividend Discount Model

Dividend Discount Model

A final method of valuing an equity security is called the dividend discount model. Using a dividend discount model (DDM) can determine whether a stock is over- or undervalued. The model arrives at a predicted value for a share of stock by summing the net present value of all future dividends in perpetuity. In short, the DDM is a discounted cash flow valuation, but it is applied to expected dividend payments rather than to expected free cash flows. This model is only appropriate for companies that pay stable regular dividends that grow at a constant rate. When using the div