The dividend low cost mannequin (DDM) is a valuation methodology used to estimate the intrinsic worth of an organization’s inventory based mostly on the current worth of its future dividends. Probably the most well-known variations is a particular formulation that assumes a relentless progress price for dividends in perpetuity. This mannequin permits for a simplified calculation utilizing available inputs resembling the present dividend, the required price of return (low cost price), and the anticipated dividend progress price. As an illustration, if an organization’s present annual dividend is $2, the required price of return is 10%, and the anticipated fixed progress price is 5%, the mannequin would calculate the intrinsic worth as $42.
This explicit DDM formulation presents buyers a simple strategy to valuing shares with predictable dividend payouts. It supplies a benchmark in opposition to which to match present market costs, probably figuring out undervalued or overvalued alternatives. Developed and popularized by Myron J. Gordon, this strategy stays a cornerstone of elementary evaluation. Its enduring relevance stems from its simplicity and its deal with dividends as a key driver of shareholder return, notably for established, dividend-paying firms. Nonetheless, its limitations, together with the idea of fixed progress, necessitate cautious consideration and infrequently complementary valuation strategies.
