Series 79: Dividend Discount Model

Dividend Discount Model

Like many ratios, the dividend discount model (DDM) is used to help determine whether a stock is over- or undervalued. It arrives at a predicted value for a share of stock based on the net present value of all future dividends the share will generate. In short, the DDM is a discounted cash flow valuation, but applied to expected dividend payments rather than to expected free cash flows. For obvious reasons, the model only works with stocks that pay dividends.

The model can also be used to value a