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Dividend discount model |
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Dividend discount modelA way of valuing a share based on the net present value of the dividends that you expect to receive in the future.The simplest version of the model assumes that the company's dividend rate remains constant. The 'fair' price of the share is the dividend (in pennies per share) divided by the required rate of return. So if you want 10% a year from your shares, the value of a company paying a 7p dividend is 70p. If you think a return of 8% is satisfactory, the value of the same share is 87.5p.A more complex model assumes that the dividends of the company grow at a consistent rate. The fair price to pay is the next dividend divided by the required rate of return minus the rate at which dividends are expected to grow. So if the 7p dividend is expected to grow at 5% per year, an investor requiring an 12% return would value the shares at (7p x 1.05) divided by (0.12 - 0.05)= (7.35p) divided by (0.07)= 105pSimilar MatchesResidual dividend approachResidual dividend approachAn approach that suggests that a firm pay dividends if and only if acceptable investment opportunities for those funds are currently unavailable. Dividend coverDividend coverThe ratio between a company's earnings (net profit after tax) and the net dividend paid to shareholders, calculated as earnings per share divided by the dividend per share.So if a company has earnings per share of 8p and it pays out a dividend of 2.1p, the dividend cover is 8 / 2.1 = 3.80Generally speaking, a ratio of 2 or higher is considered safe (in the sense that the company can well afford the dividend), but anything below 1.5 is risky. If the ratio is under 1, the company is using its retained earnings from a previous year to pay this year's dividend. Accumulated dividendAccumulated dividendA dividend that has reached its due date, but is not paid out. See: Cumulative preferred stock. Cumulative dividend featureCumulative dividend featureA requirement that any missed preferred or preference stock dividends be paid in full before any common dividend payment is made. Equalizing dividendEqualizing dividendSpecial dividends received by investors of a firm for income the investor lost because the firm altered the dividends payment schedule. Further SuggestionsInterim dividendDiscounted dividend model (DDM) Outstanding Dividends Year end dividend Dividend Discount Return Dividend in arrears Dividend capture Dividends payable dividend reinvestment plan Participating dividend Insurance dividend Dividend payout ratio dividend yield Special dividend interim dividend Tax differential view (of dividend policy) Dividend Order accumulated dividend Expected dividend yield unpaid dividend Dividends received deduction dividend dividend growth Income dividend income dividend |
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