It is a method of stock valuation in which the value of the stock is obtained by discounting the sum of all of its future dividend payments. The stocks' value is the net present value of all future dividends. This approach relies upon the assumption that dividends are fixed and steady, or grow at a constant rate indefinitely.
The formula is given by:
Value of Stock= D/r-g
D= Expected dividend per share
r= required rate of return
g= expected growth rate in perpetuity