Dividend discount model

A dividend discount model values a stock as the present value of the dividends it's expected to pay in the future, discounted back at the return an investor requires for holding it. Unlike a discounted cash flow model, which starts from projected free cash flow, this method starts from the cash a company actually pays its shareholders.

The simplest version, the Gordon Growth model, assumes one constant growth rate forever. A more realistic multi-stage version splits the timeline into a nearer term phase using a company's current growth rate, followed by a slower terminal phase using a rate it could plausibly sustain forever, mirroring the explicit period plus terminal value structure a discounted cash flow model already uses.

The method only works for a company that pays a steady, reasonably predictable dividend. A business that pays none, most young or fast growing companies reinvest everything instead, gives this model nothing to discount, and a dividend cut partway through undermines the entire estimate retroactively.