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Analyzing DCF and DDM Valuation Models

In my spare time, when I’m not engaging with nature, I work on developing various strategies to earn passive income from the American stock markets. In this process, there are some important criteria to consider when selecting stocks for investment. In this article, we will examine the Discounted Cash Flow (DCF) and Dividend Discount Model (DDM) valuation methods, which stand out among the stock selection techniques.

DCF (Discounted Cash Flow) Model

The DCF model attempts to determine the intrinsic value of a stock by calculating the present value of a company’s future cash flows. In this model, the company’s future revenues are estimated, and the present value of these revenues is found. The primary advantage of the DCF model is that it serves as a reliable valuation tool for long-term investors.

DDM (Dividend Discount Model)

The DDM model values stocks based on the dividends a company is expected to pay in the future. In this model, it is essential that the company’s dividend payments are consistent and regular. The DDM model is typically used for companies that pay dividends and provide stable income over the long term. The advantage of this model is that it is suitable for dividend-focused investors.

Other Criteria in Stock Selection

In addition to the DCF and DDM models, the current price of the stock should be compared with the values determined by these models. Moreover, the stock’s price growth trends should also be considered. By doing so, investors can increase their chances of selecting the right stocks and earning passive income from the stock market.

Conclusion

In conclusion, the DCF and DDM valuation models are important tools in the stock selection process. By using these models, investors can make more informed and strategic decisions.