Skip to main content

Stock Pricing Based on the Dividend Discount Model

One way to price stocks is to use the dividend discount model(DDM). DDM only considers a stock's dividends, its dividend changing rate and interest rate when deriving its price.

Calculator

Quarterly dividend:
dollar(s) 
Dividend changing rate quarterly:
 % 
Interest rate:
%

Math Formula

The DDM has the following math formula:

The Higher the Dividends, the Higher the Stock Price

Assume the quarterly interest rate is fixed at 0.25% and the stock pays quarterly dividends. Dividend has a positive linear relationship with stock price based on DDM.

The Higher the Interest Rate, the Lower the Stock Price

Assume the quarterly dividends is fixed at 1$ and the stock pays quarterly dividends. Interest rate has a inverse relationship with stock price and the interest rate can't be 0, because otherwise the stock price will be infinity and the interest rate can't be negative which will result in a negative stock price.

The Faster the Dividend Grows, the Higher the Stock Price

Assume the quarterly interest rate is fixed at 0.25% and the stock pays quarterly dividends. Dividends can not grow at a rate that is higher than the interest rate, because otherwise investors can just borrow money and buy the stock and push its price up indefinitely
Labels:

Comments

Post a Comment

Popular posts from this blog

Which Asset Class Had the Best Performance During the 2008 Financial Crisis?

In this article, I want to explore which asset, ETFs, MFs, Stocks, did best during the 2008 financial crisis. I will compare the investment results against the result of SPY, since it represents the overall market. The scenario is investing right at the highest point of S&P 500 index right before it crashed during the crisis. The date is Oct 9, 2007  when the index reached 1,565.15. I will compare the returns of each asset against SPY in the following order: Investing until the bottom of the crisis at 676.53 on Mar 09, 2009 in order to simulate downside risk. Investing until the S&P 500 index closed above the previous high at 1,568.61 on Apr 09, 2013 in order to simulate recover ability. Investing until the bottom of the Covid crisis at 2,304.92 on Mar 20, 2020 in order to simulate a series of market crashes. Performance By Ranks Oct 9, 2007 to Mar 09, 2009 SHY  return is 8.848% AGG  return is 7.390% LQD  return is -6.793% HYG  return i...
Post a Comment
Read more