Cash Flows: Dividends vs. Free Cash Flows vs. Residual Income

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When calculating the present value of a company, an analyst can choose between dividends, free cash flows, and residual income to derive the stock’s intrinsic price.  Each of these cash flows has advantages and drawbacks.

Dividends

These direct cash payments are a key component of an investor’s returns.

Dividend Advantages: Typically more stable than earnings; small individual shareholders cannot influence dividends, so dividend based valuation may be most appropriate from their perspective.

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