![]() ![]() No Subjectivity:There is no ambiguity regarding the definition of dividends. Companies are very specific and announce any additional dividend as a one-time dividend. They do not set up unnecessarily high dividend expectations because not living up to those expectations makes the stock price plummet at a later date. ![]() However, companies usually ensure that dividends are only paid out from cash which is expected to be present with the company every year. Companies experience a lot of volatility in measures like earnings and free cash flow. Hence, many analysts believe that there is absolutely no subjectivity involved in this model and the logic is crystal clear.Ĭonsistency: A second advantage of the dividend discount model is the fact that dividends tend to stay consistent over long periods of time. Hence, the value of the firm is basically the value of a perpetual never ending stream of dividends that the buyer intends to receive later with the passage of time. When an investor buys a share of the business, they are basically paying a price today which entitles them to enjoy the benefits of all the dividends that the corporation will pay throughout its lifetime. The justifications are rock solid and indisputable. Justification:The primary advantage of the dividend discount model is that it is grounded in theory. The purpose of this article is to discuss these advantages and bring to the students attention, when this model will be useful. The popularity stems from the fact that this model has some major advantages. This is one of the most popular models used to value businesses worldwide. Therefore, if a firm pays no dividends at all, this model cannot be applied to the firm regardless of how profitable or cash flow efficient its operations are. ![]() The difference lies in the fact that dividend discount models consider only dividends as being legitimate cash flows. The model simply discounts cash flows at a given rate just like any other DCF model. Dividend discount models are the first type of discounted cash flow models that we will study. ![]()
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