Dividend Discount Model (DDM)
A stock-valuation method that prices a share as the present value of all its future dividends. Single-stage DDM = Gordon Growth applied to dividends: P = D₁ / (r − g), where D₁ is next year's dividend, r is the required return on equity, g is the long-run sustainable dividend growth rate. Worked example: a company with $4.00 trailing dividend, 4% perpetual growth, and 9% required return is worth ($4.00 × 1.04) / 0.05 = $83.20. DDM works best for stable dividend payers (utilities, consumer staples, banks); it breaks down for growth stocks that don't pay dividends or where g approaches r. Multi-stage DDMs handle high-growth-then-mature trajectories by splitting the cash-flow stream into a near-term high-growth period (discounted explicitly) plus a Gordon terminal at the maturity year.
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Related terms
Adjusted Cost Basis · Annuity · Capital Gains Distribution · Capitalized Interest · Cost Basis · Dollar-Cost Averaging
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