Sunday, July 22, 2012

Dividend Discount Model (DDM)

The Dividend Discount Model is suitable for:
- Companies that pay dividends consistently (Singpost?)
- Companies that have established a dividend policy (Starhub?)
- Seasoned companies that are profitable non-high growth companies (e.g Utilities)

Here's the formula for DDM:






P = Fair value of stock using DDM

D = Value of dividends
g = growth rate of dividends (can take growth of earnings as proxy)
r = investor's required return