Top Dividend Stocks Based on StockNews' Dividend Discount Model

The dividend discount model used by StockNews has three components:

• its current dividend
• its expected growth in dividends, based on its historical growth in dividends
• its discount rate -- a measure of how much future dividends should be discounted to reflect the risk of the stock; discount rate is based on a combination of the risk-free rate, the equity risk premium (how much additional return investors demand for the risk of taking on equity), and its beta, which measures its volatility relative to other stocks.

The discount rate is an especially vital factor in the model. In the context of this model, its inputs are further determined by:

• Risk-Free Rate. We used the 30 year Treasury bond rate as the risk-free rate -- a measure that investors would need to surpass to take the risk of equity investment. This was seen as a conservative measure, as the 30 year bond typically has a higher interest rate than US government bonds of a shorter duration.
• Equity Risk Premium. The equity risk premium is the base amount investors demand on top of the risk-free rate for the additional risk inherently taken in investing in equities. The premium used in the StockNews model comes from the valuation work published by Aswath Damodaran.
• Beta. A stock's beta is a measure of its volatility relative to other stocks; more volatile stocks demand a higher return, and thus have a higer disount rate. StockNews calculates the stock's beta and adjusts its discount rate accordingly.