Dividend Discount Model

The dividend discount model (DDM), a variation on the idea of present value, is one of the older methods for evaluating a stock.  It is sometimes called the Gordon model, after Myron Gordon, an academic who wrote about it in 1959.

The two main ideas behind the DDM are:

1.  a stock is a funny kind of bond and so can be valued more or less the same way one would a bond (an idea that hearkens back to the day when the stock market was the exclusive province of coupon-clipping descendants of industrial tycoons); and

2. by far the most important thing to an investor is the dividends he receives, so they, not the company’s profits, should be what is evaluated.

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