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Advisor Insights

The Dividend Discount

Model Despite its shortcomings, it still has value.

The classic way to value a company is the dividend discount model, or DDM. The first serious model was invented by John Burr Williams in 1938 in The Theory of Investment Value. He started from the premise that serious investing was done in the bond market. The value of a bond was determined by the present value of all the coupon interest that would be received over the life of the bond, plus the present value of the principal repayment at maturity. Doing the arithmetic in 1938 was somewhat laborious, but tables had been compiled, making it easy to look up the answer.

Ralph Wanger does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.