The AI (ChatGPT) Stock Investing Handbook: Two Stage Dividend Discount Model

Here is the response from ChatGPT for the prompt dividend discount model two stage entered on January 11, 2023

The Two-Stage Dividend Discount Model (TSDDM) is a variation of the traditional Dividend Discount Model (DDM) that is used to estimate the intrinsic value of a stock by taking into account that a company's dividends may grow at different rates in the short-term and long-term. TSDDM assumes that the dividends will grow at a high rate in the near future (short-term) and then at a lower rate in the long-term.

The basic formula for the TSDDM is:

Intrinsic value = (D1 / (r-g1)) + (D1*(1+g1) / (r-g2)) + ... + (D1*(1+g1)^n / (r-g2)^n)

Where: D1 = the dividends to be paid in the next period r = the required rate of return or discount rate g1 = the short-term growth rate of dividends g2 = the long-term growth rate of dividends n = the number of periods

The TSDDM is a more realistic approach than the traditional DDM, as it takes into account that a company's dividends may not grow at a constant rate over time. It's also a more complex model than the traditional DDM, as it requires estimates of two growth rates (g1 and g2) and the length of the short-term period.

The TSDDM is widely used by analysts and investors, but as with any model, it has its limitations. The model is based on the assumptions and estimates of future dividends and growth rates, which can be uncertain and might not be accurate. It's important to use it in conjunction with other analysis methods and to be aware of the limitations and uncertainties that come with any model.

Dividend Discount Model Gordon Growth Model


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