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