What does the Dividend Discount Model (DDM) primarily measure for a company?

The Dividend Discount Model (DDM) is designed specifically to value a company's stock by looking at its expected future dividends. The model operates on the principle that the value of a stock is essentially the present value of all future dividends that it is expected to pay to shareholders. By focusing on dividends, the DDM reflects the actual cash flows returned to investors, which is a key consideration for those looking to invest primarily for income.

The emphasis on dividends distinguishes the DDM from other valuation models that may consider a company's overall cash flow potential, total asset value, or growth rates in equity. While future cash flows are certainly important in evaluating overall corporate performance and worth, they are not the direct focus of the DDM.

By measuring the value of the excess cash distributed as dividends, the DDM provides a clear picture of how much investors can expect to receive from their investment in the form of dividends, making it a useful tool for dividend-seeking investors. This focuses investors' attention on the cash returns they are likely to see, rather than trying to gauge the company's total assets or its growth in equity, which can be influenced by various external factors and may not yield direct returns to shareholders.