With the dividend discount model, payments of future dividends are discounted; rather than that of a cash flow. This means that the present value of a certain stock is the total overall of the present value in regards to the future dividends. Also, the organization using this method will most likely not have all of the cash flows as dividends; which is the major difference in the two methods that are listed.
The discounted cash flow model has certain differences with the dividend discount model. Any minimal changes in the area of inputs will come out to make huge impacts in an organization’s value. This method is mostly used in organizations that have had high rates of growth. The discounted cash flow method would most likely be used to evaluate future outcomes for a business. This involves: the most likely, worst, and the best case scenarios with cash flows.
This method differs from the dividend discount method because cash flows can be not 100% accurate and settled. Meaning, they can fluctuate and increase, or decrease; causing unpredictability. Any small change in the return rate would impact the current value in a large manner. On the other hand, if the dividends on the dividend discount model are not sustainable, the model will not be able to be used effectively. These dividends would be taxed regarding the year they are sustained.
Discounted Cash Flow Analysis | Best Guide to DCF Valuation. (2019, January 14). Retrieved January 17, 2019, from https://www.wallstreetmojo.com/dcf-discounted-cash-flow/
Chen, J. (2018, December 13). Dividend Discount Model – DDM. Retrieved January 17, 2019, from https://www.investopedia.com/terms/d/ddm.asp
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