Dividend Valuation Model

Definition - What does Dividend Valuation Model mean?

Dividend valuation model is the most important formula within the equities section. You will need to be careful interpreting the question. You are looking for next year’s dividend. Where questions say, "last year’s dividend was" (or more confusingly even "this year’s dividend was") you will need to gross up by a year’s worth of growth to work out what next year’s dividend will be.

Testopedia explains Dividend Valuation Model

With regards to the dividend valuation model, expect to have to work out a growth rate. Sustainable growth rate is ROE x the retention rate. Also, when using Gordon’s Growth Model to work out an implied P/E, dividing both sides by EPS gets you (Div per share ÷ Earnings per share) ÷ (r - g) and that DPS ÷ EPS = Payout ratio. The retention rate can be calculated as "1 - payout ratio".

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