Dividend discount model (DDM)

Definition

Dividend discount model (DDM) in plain English

The dividend discount model asks a simple question: what is a share of stock really worth? Its answer is that a share is worth all the future cash the company will hand you as dividends (the regular payouts companies make to their owners) — but with a twist: a dollar you'll get years from now is worth less to you than a dollar today, so you "discount" each future payment down to its value in today's money. Think of buying a fruit tree not for the tree itself but for every basket of fruit it will give you over its life, counting fruit you'll wait years for as worth a bit less. Add up all those discounted future dividends, and that total is what the model says the stock should cost.

Learn these first

• Capital asset pricing model (CAPM)

Related Principles of Finance terms

• Accrued interest
• Allocation effect
• Basis
• Basis point
• Benchmark
• Bond-equivalent yield (BEY)
• Bootstrapping
• Callable bond
• Clean price
• Comparable company analysis (comps)