How to Value Stocks of Firms with Dividend Growth Model?

How to Value Stocks of Firms with Dividend Growth Model?

Valuing stocks of firms withdividend growth modelis an effective way of determining the intrinsic value of a company's stock. This model ofvaluationis based on the future expected dividends of a company and the rate at which these dividends are expected to grow. In this article, we will look at the steps involved in valuing stocks of firms with dividend growth model and also explore some investment strategies.

Understanding Dividend Growth Model

Dividend growth model is a valuation method that is used to determine the intrinsic value of a company's stock. This method assumes that the value of a stock is equal to the sum of its future expected dividends, discounted back to their present value. The model is based on the premise that investors buy stocks for the income they provide in the form of dividends.

Steps Involved in Valuing Stocks with Dividend Growth Model

1. Forecast the future dividends: The first step in valuing a stock with dividend growth model is to forecast the future dividends of the company. This involves analyzing the company's financial statements and projecting the future growth rate of its dividends.

2. Determine thediscount rate: The second step involves determining the discount rate, which is the rate at which future cash flows are discounted to their present value. This rate is determined by the risk associated with the investment and the opportunity cost of investing in other assets.

3. Calculate the present value of future dividends: The final step involves calculating the present value of the future dividends by discounting them to their present value using the discount rate. This will give us the intrinsic value of the stock.

Investment Strategies

1. Dividend investing: Dividend investing is a popular investment strategy that involves investing in companies that pay high dividends. This strategy is based on the premise that companies that pay high dividends are financially stable and have a history of consistent growth.

2. Growth investing: Growth investing is another popular investment strategy that involves investing in companies that have a high potential for growth. This strategy is based on the premise that companies that have a high potential for growth will generate higher returns in the future.

Conclusion

Valuing stocks of firms with dividend growth model is an effective way of determining the intrinsic value of a company's stock. This model is based on the future expected dividends of a company and the rate at which these dividends are expected to grow. Investors can use this model to make informed investment decisions and also explore different investment strategies such as dividend investing and growth investing.