Talk:Dividend Discount Model

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 Definition The value of a share is (definitionally) equal to the total of its discounted future dividend payments. [d] [e]

Discussion invited!

I'm not sure whether much more could be said on this subject. The formulas are, afaik, correct. The assumptions are enumerated, and the practical limitatiations arising from those assumptions are described.

In my experience (but I'm into bonds and macro economics, and try to stay away from equities as far as possible) the DDM is not used much in day-to-day equities portfolio management. Theoretically, it is no doubt quite sound, but reality as often as not refuses to behave according to the textbooks.;)

I think this article could be listed as "fit for pulication", in the sense that it is, in its present form, correct as to facts and sufficiently complete.

Best regards, Martin van Dalen 13:38, 20 November 2006 (CST)

Almost-finished?

Hi all,

I thinks that this article is the example of an "almost-finished article". Everyone interested in that matter should take a look at it. Annote it, modify,.. etc.. and then, in some times (one week..?), it should be removed from the workgroup.

As soon as it someone found that an article is "almost-finished", we should notice it in the Talk page. Anh Nguyen 01:36, 21 November 2006 (CST)

Glad to read you agree with me. BTW, does anybody know what the formal procedure is for approval? Martin van Dalen 13:33, 23 November 2006 (CST)

Hi, I think that we should move this article in the for approval section Anh Nguyen

Proposal to delete

This model is tautological. It says no more than that the value of a share in a company is determined by its future dividend payments. Since dividends are the only benefit that a company pays to a shareholder, that is a circular statement. The fact that future payments have to be discounted in order to arrive at their present value is also a tautology, reflecting nothing beyond the definition of the concept of discounting. I suggest that CZ should avoid taking up readers' time with such trivialities and that the model deserves no more than a dismissive mention in a more general article. Nick Gardner 16:12, 27 February 2008 (CST)

Hi Nick,
Even if I find that article also quite tautological and basic I think that we should keep it as it is. As CZ readers come from all specialities, a good introduction on basic economics stuff should be present. From my experience as lecturer, it is not so obvious for everyone that the value of a company is determined by future dividends.

Removing it should be discussed about the level of CS articles. Should we or shouldn't we have "introductory articles" ? Anh Nguyen 02:46, 28 February 2008 (CST)

Hello Anh

Point taken - I agree that we cannot do without tautologies. But I suggest that the subject is now adequately covered in the article on Financial economics - on which I should, of course, value your comments. Nick Gardner 06:44, 28 February 2008 (CST)

Article name

I looked at a bunch of seemingly-authoritative sources, and they seem roughly evenly divided as to whether to use "Dividend discount model" or "Dividend Discount Model". The text in the article should match the title, though... J. Noel Chiappa 10:16, 13 April 2008 (CDT)

Nomination for Approval

I believe I've answered Aleta's question marked in the comment of heading, and have followed Noel's suggestion to move to a title with capitalization that's consistent with the text. (Thank you, both!) I agree with Anh that this would be useful introduction for a beginning student. Given that its accuracy appears well agreed upon, I see no reason why this article shouldn't be nominated for approval. Stephen Saletta 23:09, 17 April 2008 (CDT)

As I have noted above, I am not convinced of the need for this article in addition to those on financial economics and discounted cash flow, but in any case I suggest that several changes should be made before this article is approved:

  • The statement that the model is widely used requires qualification to avoid giving the newcomer the impression that it is the principle method used to value equities. It seems unreasonable to ignore the equity valuation methods described in the article on financial economics and not to provide a link to that article. (The reference to CAPM as an input to the model might then be dropped. As it stands it might be confusing to a newcomer).
  • It also seems appropriate to note that the method described can be applied not only to dividends but to any future cash flows, and to provide a link to the article on discounted cash flow.
  • The list of assumptions should be revised to note that no assumption other than the first is necessary, provided that it can be assumed that future dividends are known to everybody - including future purchasers. If it is assumed that both the timing and amounts of the payments are known, it is certainly unnecessary to assume that payments are made every year, or that they continue for ever.
  • To conform with the format that has generally been adopted for economics articles, the algebraic passages should be transferred to the tutorials page.

Nick Gardner 05:18, 19 April 2008 (CDT)

I am not familiar with this topic at all. However, I note that the presentation of the English in the article means that it is not ready for Approval. I also note the comment above by Nick, which make sense to me. I also suggest that the formulae need to be shifted to a subpage: they are too technical for the average CZ reader, and are inconsistent with the general approach taken on CZ. Therefore, I suggest that we defer Approval until more work is done on this article. Martin Baldwin-Edwards 04:37, 23 April 2008 (CDT)
I think this article does merit itself as an article apart from the financial economics page. It's a stand-alone concept in the bigger picture of financial economics.
  • I would welcome links to additional methods of asset estimation as well as the financial economics page.
  • I would welcome a qualification on the "widely used" statement. Perhaps, "The DDM describes one approach used to value common stock(s?). While more comprehensive approaches are in use today, the DDM represents a conceptual framwork for how stocks might be valued if investors only took into account the dividends that corporations pay to their shareholders."
  • I would welcome an additional reference or definition of "required rate of return."
  • I think the assumptions are clearly written as-is. While they could, in theory, be collapsed into a simple assumption, and similar approaches can be used to value other types of asset, I think the existing form - the DDM as a stock valuation technique - and assumptions are valid as written.
  • Sometimes you just can't get around maths. If it is too complicated as is, why not leave the Zero Growth dividend on the front page (the simplest, and I think not too confusing) and moving the other permutations to the tutorial page?
  • If there are english/grammar corrections you'd like to see, please make them.
...discussion and edits continue on the article. When an article is nominated for approval, this status often draws new eyes to the article, and it can be expected that revisions will occur...[1]
I'll push the approval date back a week, this article has been languishing as "almost approved" for too long.Stephen Saletta 14:05, 23 April 2008 (CDT)

I think there are better candidates for approval than this (in Economics). There is some controversy about its content, and great doubt in my mind about its usefulness. THis is not to say that we should not have the article, but I am not enthusiastic about it. Martin Baldwin-Edwards 18:08, 23 April 2008 (CDT)


I don't think your suggestions go far enough to justify approval. Do you not agree that the existence of methods of valuation that do not require the achievement of the impossible feat of forecasting the future flow of dividends puts the dividend discount model somewhat at a disavantage by comparison? If so, do you not agree that the article would be misleading if that important point were not brought out? And as regards the assumptions, it seems that I have not made my point with sufficient clarity. Let me remind you that the article as it stands presents two inconsistent statements:

  • The first statement is "DDM can be expressed mathematically as:

,

where is the expected dividend in period and is the required rate of return for the investor."

and

  • The second is that it is necessary to assume that "Dividends are expected to be distributed at the end of each year until infinity."

So the first statement says that the payment times can be specified, and the second says that they cannot be specified. but have to be taken as annually and for ever. My point here was not about presentation but about faulty logic Nick Gardner 15:48, 23 April 2008 (CDT)


Removed Approval notice

I am sorry to step on your toes, Stephen, but really we have to answer criticisms of articles before approving them. I claim no expertise in this area, but Nick is clearly very unhappy with the content. We need to be clear that this article really is deserving of approval, especially as there have not been any real changes since it was nominated. Martin Baldwin-Edwards 21:43, 6 May 2008 (CDT)