How to Calculate Dividend Discount
What is Dividend Discount?
Dividend Discount Model values stock as present value of all future dividends: P = D₁/(r-g) where D₁ is next dividend, r is return, g is growth.
Step-by-Step Guide
- 1Input next dividend, growth rate, required return
- 2Calculate intrinsic value
- 3Compare to market price for investment decision
Worked Examples
Input
Dividend $2, growth 5%, required return 10%
Result
Intrinsic value = $2 / (0.10-0.05) = $40
Highly sensitive to assumptions
Common Mistakes to Avoid
- ✕Using inappropriate growth rate
- ✕Assuming growth perpetual (unrealistic)
- ✕Neglecting terminal value
Frequently Asked Questions
Does DDM work for non-dividend stocks?
Not directly; requires expected future dividends or assumes buyback equivalent.
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