Some Evidence on the Value of Dividend Discount Models

Abstract

Systematic use of dividend discount models has the potential to add value to the portfolio management process. Using consensus forecasts of earnings growth, the authors tested four valuation models ranging in complexity from a simple price-earnings ratio model to a threeperiod dividend discount model. Each model was used to rank 150 stocks from the SP this difference increased to 35.63 per cent when the three-period model was used for ranking. Adjustment for risk improved model performance, especially when used in conjunction with the more complex models.