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How do dividends impact the value of a share of stock? Please explain.

How do dividends impact the value of a share of stock? Please explain.

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Answer #1

According to Gordon Dividend growth model, the value of stock is the discounted value of future dividends of the firm. The Dividends can be assumed to grow in a multi stage model. For example, if a two stage model is considered, the dividends grow at certain high rate during the first period followed by a constant terminal growth rate upto infinity. These dividends are discounted at the cost of equity to arrive at the value of equity.

Any change in growth rate in dividends can affect the value of the stock.

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