Question

Explain the dividend discount model as a basis for stock valuation, including a example in your initial post. What are the challenges of predicting future dividends, and what other factors affecting stock price are not accounted for in the dividend discount model?  

Answer 1

Before answering this question i have to discuss about the TVM concept (Time value Money) in this topic we understand that if we received $ 1000 after 5 year then whats is the value of that amount is spot market or we can say that in present so i can compair that Investment with the other investments.

Now lets talk about dividend discount model in which we will discount each and every dividend which we received in the future year on stocks so i can calculate the fair value of that stock so i can easily compair that stock with other stocks.

The Dividend Discount Model (DDM) is a quantitative method of valuing a company's stock price based on the assumption that the current fair price of a stock equals the sum of all of the company's future dividends. The primary difference in the valuationmethods lies in how the cash flows are discounted.

Drawbacks of using the dividend discount model (DDM) include the difficulty of accurate projections, the fact that it does not factor in buybacks and its fundamental assumption of income only from dividends

Now some time due to unexpected situations we will didn’t get any dividend due to unexpected things as we are in current situation of covid 19.

As we know so many companies impacted with this covid so they may be halt dividend for few months or year.

I hope its okay for you please if you have more queries then please reach me through comment section i really happy to help you.

thanks