Dividends as Cash Flow

The value of any asset must equal the present value of its future cash flows, discounted at a rate that reflects its inherent risk. Since neither the future cash flows nor the appropriate discount rate can be known with certainty, valuation is inherently an estimation.

In a dividend discount model (DDM), dividends are assumed to be the primary cash flow for an investor in a stock. Even when the investor plans to sell the stock at a future date, the value at that time will be the present value of any subsequent dividends, so a discounted dividend approach should still be valid. Still, for companies that do not pay dividends other methods may be more appropriate. The DDM is most appropriate for use when:

  • The company pays a dividend
  • The dividend policy has an understandable and consistent relationship to profitability
  • The investor does not plan to gain full control of the company
For more information, see all articles on: Investing in Stocks, Valuation

See also:
  • Free Cash Flow as Cash Flow
  • Computing Free Cash Flow to Equity from Free Cash Flow to the Firm
  • Cash Flow from Operating Activities
  • Computing Free Cash Flow to the Firm from the Statement of Cash Flows
  • Free Cash Flow
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