Dividend Discount Model

One of the most popular ways to value a dividend paying stocks is by using the Dividend Discount Model. This type of vlauation is also known as the Gordon Model and uses the Time Value of Money to determine the present value of future cash flows or dividend payments.

David Templeton has a great post on the dividend discount model over at his blog the Disciplined Investor. He also points us to a great Dividend Discount Model calculator at where else, dividenddiscountmodel.com.

Dividend Discount Model Defined
The dividend discount model can be a worthwhile tool for equity valuation. Financial theory states that the value of a stock is the worth all of the future cash flows expected to be generated by the firm discounted by an appropriate risk-adjusted rate. We can use dividends as a measure of the cash flows returned to the shareholder.

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