What does the "dividend discount model" in equity valuation estimate?

The dividend discount model (DDM) is a fundamental equity valuation method that is based on the premise that the value of a stock is derived from the present value of its expected future dividends. In other words, the DDM calculates the intrinsic value of a stock by estimating the future dividends that a company will pay to its shareholders and then discounting those dividends back to their present value using an appropriate discount rate.

This approach operates under the assumption that dividends are a crucial component of total investment returns for equity investors, and therefore, the valuation is focused on the stream of cash flows that will be provided to shareholders in the form of dividends. The model is particularly useful for companies that are stable and have a history of paying consistent and predictable dividends.

While the other options may relate to different aspects of investing or valuation, they do not accurately capture the core purpose of the dividend discount model in estimating the value of a stock based on future dividend payments. For example, estimating capital gains or market capitalization involves different analytical methodologies that do not focus specifically on dividends as the DDM does.