Why use the Dividend Discount Model when evaluating stocks?

Question

I don't know the exact stats but I think most stocks don't even pay out a dividend anymore. Most of the profits come from an increase in share price. If a company gives a large dividend payout, doesn't it imply the firm can't grow any more (it can't see a way to invest in itself to increase share holder value and thus pays out the cash).

Answer 1

The dividend discount model is still used because receiving dividends is a payment from the company to the investor so has to be taken into account when valuing the stock of the company, and when valuing the return (or potential value) of the stock to the investor.

Usually more mature firms payout higher dividends as they don't need to invest as much in themselves as companies who have not been around as long and who are still acquiring assets for example. I would imagine that your statement that most investor profits come from an increase in share price is more of an industry specific thing than representing the market as a whole - eg most companies in the computer industry you wouldn't expect to pay dividends, but more established companies and industries you would expect to pay out

Answer 2

I will agree about the dividends vs. capital gain. Some old (established?) industries just don't have a way to re-invest their profits for growth easily. I think here of rails and mining as examples. But everybody in hi-tech, be it electronics or bio or aerospace or whatever, plows most of their profit back into the company and doesn't pay anything like dividends.