Mission

The main goal of Dividend Stock Valuation website is to provide dividend investors with different dividend stock valuation calculators which all use John Burr Williams’ idea that the value of a dividend stock is equal to the present worth of all its future dividends.

By allowing dividend investors to quickly determine the estimated values of dividend stocks, order the calculators will enable dividend investors to make more informed decisions when buying and selling dividend stocks.

Background

Who is John Burr Williams?

John Williams is the author of the seminal book “The Theory of Investment Value”. In his book, written more than 80 years ago, Williams posited that the value of a stock, more particularly of a dividend-paying stock, is equal to the present worth of all its future dividends.

Williams synthesized this idea in the following formula:

Formula 1
where V0 is the calculated value of the stock

d0 is the current annualized dividend rate

g is the estimated constant dividend growth rate

i is the estimated constant discount rate

t is the year of the future dividend

Essentially, Williams is the father of the Discounted Dividend Model.

What is interesting about Williams’ formula is that it provides a stock valuation which is independent of the state of the stock market.

As you can see, none of the parameters that go into Williams’ formula are related to the state of the stock market. The current dividend rate is set by the company, the future dividend growth rate will be set by the company, and the discount rate is set by you, the dividend investor.

The only problem with Williams’ formula is that infinity is a long time to wait to get the full value of a dividend stock. Personally, I would rather see the color of these dividends in my lifetime. In any event, no one can reasonably predict how a company will evolve so far away in the future.

So, to get a realistic value within a reasonable time frame, I have made two changes to Williams’ formula.

First, instead of calculating the present worth of all the future dividends, I have tweaked the formula so that it calculates the present worth of a limited number of dividends. In other words, the formula stops after n years, n being a reasonable number of years (e.g. 20 years).

With this first change, the formula now looks like this:

Formula 2
where V0 is the calculated value of the stock

d0 is the current annualized dividend rate

g is the estimated constant dividend growth rate

i is the estimated constant discount rate

t is the year of the future dividend

n is the number of years

The second change I have made is more minor. In Williams’ original formula, the first year of dividend is both multiplied by the estimated growth rate and discounted by the estmated discount rate.

In my view, the first year of dividend should not be affected either by the growth rate or by the discount rate. The main reason behind this change is that the first year of dividend can be reasonably predicted based on the most recently declared quarterly or monthly divdend, and that the first year of dividend is very unlikely to be either cut or affected by inflation.

Frankly, this is a personal choice as this second change does not significantly affect the final valuation.

With this second change, the formula now looks like this:

Formula 3
where V0 is the calculated value of the stock

d0 is the current annualized dividend rate

g is the estimated constant dividend growth rate

i is the estimated constant discount rate

t is the year of the future dividend

n is the number of years

So, for the sake of full disclosure, this last formula is the formula behind every valuations calculated on Dividend Stock Valuation website.

Inspiration

I’m Frank, the Dividend Engineer. I’m the blogger behind the dividendengineering.com blog.

On my blog, I’m often asked how I calculate the values of the stocks I analyze.

The short answer is: I use a slightly modified version of Williams’ formula, the third formula above, that I have programmed into a spreadsheet.

But this answer does not really help my readers.

As an engineer, I asked myself how could I do this better, how could I help my readers, and all the dividend investors out there, to quickly calculate a valuation for a dividend stock.

After thinking about it for some time, I had an idea, a website where dividend investors would be able to calculate the valuations themselves with their own parameters.

What you see now is the result of this idea.

It’s not perfect yet. But with your help, I will make it better!