Dividend Discount Model

Explanation

The DDM is the oldest equity valuation model, derived from the idea that a stock's fundamental value is the stream of cash payments it provides to shareholders. The Gordon Growth Model simplifies DDM by assuming constant dividend growth in perpetuity. While elegant, DDM has significant limitations: it cannot value non-dividend-paying companies (most growth stocks), and it's extremely sensitive to the growth rate assumption — a 1% change in assumed growth can change the valuation by 20-30%.

Formula

Example

A stock pays a $3 annual dividend, expected to grow at 5% annually. Required return is 10%.

The Gordon Growth Model values this stock at $60 based on its dividend stream.

How Stoquity Uses This

Stoquity incorporates dividend discount model analysis across its portfolio management platform, providing real-time monitoring and AI-powered insights for every portfolio.