How Institutional Analysts Use Dividend Discount Models

Summary

The document answers whether large banks and institutional investors use dividend discount models for equity valuation. It says DDM is used in professional practice and suggests that analysts may use a two-stage version more often than the single-stage Gordon growth model. The two-stage approach allows the forecast to distinguish between periods of dividend growth, though the document does not explain its calculations or assumptions.

As support, the response points to a survey of equity valuation practices among professional analysts, indicating that DDM appears in a substantial number of cases even if it may not be the most popular method. It does not provide the survey’s figures or establish how usage differs by institution, market, or analyst. The answer is therefore a broad account of DDM’s presence in practice, not evidence that every large investor uses it or a comparison of its valuation accuracy against other methods.

Key ideas

• Dividend discount models are used by professional equity analysts.
• The response suggests that two-stage DDM may be used more often than the single-stage Gordon model.
• A survey of professional valuation practice is cited as evidence of DDM use.
• DDM is reported to appear in a substantial number of cases, though it may not be the most popular technique.
• The document provides no detailed usage figures or comparison of valuation accuracy.

Tags

# The extent of the usage of DDM formula by the big boys


# The extent of the usage of DDM formula by the big boys












I am wondering to which extent versions of the DDM formula(https://en.wikipedia.org/wiki/Dividend_discount_model) is used by large banks and institutional investors etc, in some sense anyone who is not a retail investor.

## Answer by nbbo2 (score 2, accepted)

https://quant.stackexchange.com/a/53064

DDM definitely used in practice. Probably the Two Stage Dividend Discount model is used more often that the 1 stage or Gordon model described in the Wikipedia article.

From time to time there are surveys of techniques used by equity analysts, for example Equity Valuation: A Survey of Professional Practice by G. Pinto (2005), SSRN 2657717. You can see some figures concerning DDM on Page 5 and on Page 17, or read the entire report for more details. It may not be the most popular technique but is used in a substantial number of cases.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.