gen-briefly-explain-the-dividend-discount-model-and-one-common-m-d63a

Briefly explain the dividend discount model and one common misconception about it.

## Dividend Discount Model (DDM) The DDM is a valuation method that estimates a stock's intrinsic value based on the present value of all its future dividend payments. The basic formula is: **Stock Value = D₁ / (r - g)** Where: - D₁ = Expected dividend next year - r = Required rate of return - g = Dividend growth rate ## Common Misconception **"The DDM only works for companies currently paying dividends"** This is false. The model can value any company expected to pay dividends *eventually*, even if they pay none today. Growth companies that reinvest all earnings now may still be valued using DDM if they're expected to initiate dividends in the future. The model simply discounts those future payments back to present value—whenever they're expected to begin. The real limitation is that DDM struggles with companies that will *never* pay dividends (keeping cash indefinitely or only returning value through buybacks), not those that merely don't pay them *yet*.