What is intrinsic value of a stock?
Intrinsic value is the theoretical worth of a stock based on its expected future dividends. It helps investors identify if a stock is undervalued, fairly valued, or overvalued compared to its current market price.
What is the Gordon Growth Model?
The Gordon Growth Model is a formula that calculates stock intrinsic value (V = D1 / (r - g)), where D1 is next year's dividend, r is required return, and g is the dividend growth rate.
What does margin of safety mean?
Margin of safety is the difference between a stock's intrinsic value and its current market price. A larger margin indicates the stock is more undervalued, providing a buffer against errors.
What is a typical dividend growth rate?
Typical dividend growth rates range from 2% to 8% annually, depending on industry and company maturity. Mature companies usually have lower growth rates (2-5%) while growth companies may see higher rates (5-10%).
Does the Gordon Growth Model work for all stocks?
No, the Gordon Growth Model works best for mature, dividend-paying companies with stable growth rates. It may not be suitable for non-dividend stocks, startups, or highly volatile companies with unpredictable dividend policies.