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The Dividend Growth Secret by RYSB: 6:54pm On Oct 08, 2008 |
The official description of the Dividend Growth Model is; 'A stock valuation model that deals with dividends and their growth, discounted to today'. This model assumes that the basis of the valuation of stock is: The Current Dividend Growth of the Dividend Required Rate of Return It is best to describe this model by using an example. Assume that a stock is paying $2.00 per year in dividends, growing at 3.5% per year. The so-called variable item in this example is the investors required rate of return, which we will assume is 12.4%. The formula for the Dividend Growth Model is: Value = (Current Dividend * (1 + Dividend Growth)) / (Required Return - Dividend Growth) Now, let's insert the assumptions for the example into this formula: Value = (N2 * (1 + .035)) / (.124 - .035) Value = N23.26 Now what does this mean? Basically this means that based on the current situation (the assumptions) this stock should yield a 12.4% average annual return at a price of $23.26. You might want to look at the required rate of return example for a discussion of that piece of this puzzle. USE A CALCULATOR: http://www.finplan.com/invest/divgcalc.htm If you like this post then log on to www.reportyourstockbroker.com for more Gordon Growth Model What does it Mean? A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. Given a dividend per share that is payable in one year, and the assumption that the dividend grows at a constant rate in perpetuity, the model solves for the present value of the infinite series of future dividends. STOCK VALUE (P) = D/ K-G Where: D = Expected dividend per share one year from now K = Required Rate of Return for equity investor G = Growth rate in dividends (in perpetuity) Because the model simplistically assumes a constant growth rate, it is generally only used for mature companies (or broad market indices) with low to moderate growth rates. If you liked this post then log on t o www.reportyourstockbroker.com |
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