Definition
The DDM values equity by discounting expected future dividends to present value. The Gordon Growth Model (constant growth DDM) is the simplest version, assuming dividends grow at a constant rate forever. Multi-stage DDMs accommodate different growth phases. DDM works best for stable, mature dividend payers like utilities and consumer staples.
functions Formula
P = D₁ / (r − g)
lightbulb Example
Expected dividend next year is $3.00, required return is 10%, dividend growth rate is 4%. P = $3.00 / (0.10 - 0.04) = $50.00 fair value.
verified_user Key Points
- Best for stable dividend-paying companies
- Gordon Growth Model assumes constant growth forever
- Multi-stage DDM handles different growth phases
- Requires dividend growth rate less than discount rate