The Gordon growth model is used to determine 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 the dividend grows at a constant rate in perpetuity, the model solves for the present value of the infinite series of future dividends
The dividend discount model (DDM) is a procedure for valuing the price of a stock by using the predicted dividends and discounting them back to the present value.
Value of Stock = Dividend pay-out next year / (Discount rate – Expected growth rate)
Why you shouldn’t use DDM:
The value of companies which do not pay dividend would be 0.
Only companies lacking investment opportunities give dividend, so it would overvalue companies in decline and undervalue growing companies
It does not take into account buybacks, which is distribution of profits just like dividends
