- The Value Investor
- Posts
- Topic 3.7: Dividend Discount Models (DDM)
Topic 3.7: Dividend Discount Models (DDM)
Learn the Dividend Discount Model (DDM) for stock valuation. Our guide covers the Gordon Growth Model, its uses for income investors, and why many value investors are cautious about this method.
Milan Reichl
June 20th, 2025 • Reading Time: 14 minutes
Dividend Discount Models (DDM)
Welcome back, dedicated value seekers! We've journeyed deep into the heart of valuation. With Discounted Cash Flow (DCF), we acted as futurists, forecasting a company's entire economic output. With Net Asset Value (NAV), we played the role of pragmatic liquidators, assessing breakup value. Most recently, with Earnings Power Value (EPV), we became stern realists, valuing a company based only on its current, no-growth profitability.
Each of these methods gave us a powerful, yet indirect, way to think about value. But what if we stripped away all the layers of abstraction? What if we ignored complex cash flow calculations and asset appraisals and focused on the one thing that is undeniably real, the one tangible return that a company puts directly from its vault into your pocket?
We're talking, of course, about dividends.
For generations of investors, dividends have been the ultimate proof of a company's success and its commitment to shareholders. It’s the most direct answer to the investor's core demand: "Show me the money." Today, we explore the valuation model built entirely around this principle: the Dividend Discount Model (DDM). It's a method as old as the stock market itself, operating on a premise so simple it's almost deceptive: a stock is worth nothing more than the present value of all the future dividends it will ever pay.
This approach seems straightforward, right? Just predict the dividends and discount them back. But this simplicity hides a profound depth. Mastering the DDM isn't just about forecasting payments; it's about decoding a management team's entire philosophy on growth, risk, and shareholder returns. It's about understanding the delicate dance between retaining earnings to grow the business and distributing profits to reward owners. To truly unlock the power of this model, you must first understand the fundamental equation that connects a company's ability to grow with its decision to pay a dividend. And that all hinges on one critical, often overlooked, ratio...