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Why is the dividend discount model used very little in practice even if it is a...

Why is the dividend discount model used very little in practice even if it is a theoretically correct model to use?

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Despite being a theoretically model, DDM is not used because,

  • The DDM model is full of too many assumptions. There are assumptions regarding growth rate, interest rates and tax rates which are not practically viable in real world. Most of these conditions are not in the control of the investors. These assumptions reduces the validity of DDM
  • Another major drawback is the fact that DDM implicitly assumes that the dividends paid out are directly in relations to earnings of the organization. This means that higher earnings from the company will translate into higher dividends and vice versa. But, in reality, this never happens. Companies have strived to maintain stable dividend payouts, even if they are facing extreme variations in their earnings
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