If a company recently paid a dividend of $2.60, what does this imply for D1 in the valuation model?

In the context of the dividend discount model (DDM), D1 represents the expected dividend payment for the next period, which is typically projected based on the most recent dividend paid (D0) along with an anticipated growth rate.

Since the company recently paid a dividend of $2.60, D0 is established at $2.60. To find D1, you typically apply the growth rate to the most recent dividend. If we assume that there is a growth rate that will take the dividend from $2.60 to $2.66, that would indicate a modest increase, often in line with the company's historical growth in dividends or industry averages.

Therefore, if D0 is $2.60 and the expected increase leads us to a D1 of $2.66, it suggests that the dividend is expected to grow slightly for the next payment. This aligns with the valuation model where future dividends are considered when valuing the stock.

Choosing $2.66 as D1 communicates that there is an expectation of growth in the dividends being paid, which is a fundamental component in assessing the value of a stock based on its dividend payments.