Multistage Dividend Discount Model

The multistage dividend discount model is a method for estimating the value of a stock. The multistage dividend discount model is built off the back of an older equity valuation model known as the Gordon growth model.

Investors use these models to figure out the intrinsic value of a stock. In other words: investors don’t trust the prices on the stock market. What if a stock is bloated and overpriced? Or if one is a steal? These models differentiate between a stock’s current price and it’s actual (predicted) value.

When would an investor use the multistage dividend discount model over the Gordon growth model? When they feelin’ fancy. The Gordon growth model assumes constant growth, and is pretty simple, which works okay for large, stable companies, but not so much for everybody else. The multistage dividend discount model lets investors stir other factors into the pot to try to make their valuation estimates more accurate: things like unstable growth rates in the beginning and taking into account the business cycle. Sounds like a recipe for better stock valuation to us.