07 May Dividend Growth Model
Posted at 09:05h in 0 Comments
What is a Dividend Growth Model?
DefinitionThe dividend growth model can be used to determine the value of a company’s stock. According to this model, a stock’s price is a function of the dividend that it pays. The dividend growth model ignores other factors that contribute to a share’s value. For example, this model does not take the market share of a company’s products into account. Neither does it give any importance to a company’s brand value.
The dividend growth model essentially values a company’s stock based on its current dividend payout and the expected payout in the future. It says that: Stock value = D/ (k-g) Where: D = the dividend that the company is expected to pay in the next year. k = this is the required rate of return that an investor needs to justify buying a particular stock. g = the rate at which the company’s dividend is expected to grow at.
What does dividend growth model mean?
Steve, a stock analyst, has been given the task of calculating the value of Riverside Corporation’s stock using the dividend growth model. The relevant details for Riverside Corporation are as follows:
Example of dividend growth model
- Current rate of annual dividend = $1.75 per share.
- It is expected that the dividend will grow at 4% per year.
The dividend growth model can be used to make a stock investment decision. However, this model ignores non-dividend factors and should be used in conjunction with other tools that help determine a stock’s fair value.