Multi-Stage Dividend Discount Models

  • Unlike the Multiple Holding Period DDM previously described, the Multi-Stage Dividend Discount Model allows for multiple growth rates in calculating a stock value.

  • The allowance of multiple growth rates is more realistic, companies commonly experience a growth phase, a transitional phase (as new competition enters the market driving down returns), and a mature phase.

  • Naturally this implies that a Three Stage DDM could be tested; see the official curriculum for a detailed example.

  • The Multi-Stage DDM presents the analyst an opportunity to account for the different growth rates that a company may experience in these different growth phases.

  • The Two Stage High Growth followed by Stable Growth DDM:

  • The formula for a High Growth followed by Stable Growth Two Stage DDM may look daunting at first, but its components are logical and build upon the foundation of the basic DDM principles.