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Dividend Discount Model (DDM)

Values a stock as the present value of future dividends.

The DDM values a stock by discounting expected future dividends at the required rate of return. The Gordon Growth Model is the simplest form, assuming constant dividend growth in perpetuity. It works best for stable, mature dividend-paying companies and breaks down when growth approaches or exceeds the discount rate.

Formula
P=D1r−gP = \frac{D_1}{r - g}
Where
PP=Intrinsic share price
D1D_1=Expected dividend next period
rr=Required rate of return
gg=Constant dividend growth rate
Related Terms

Discounted Cash Flow (DCF)

Intrinsic valuation by discounting projected free cash flows to present value.

Gordon Growth Model

Single-stage DDM assuming constant dividend growth in perpetuity.

H-Model

Two-stage DDM with linear growth decay from high to stable rate.

Dividend Yield

Annual dividend per share divided by share price — the income return.