How to use the calculator
- Type a ticker to fill in the yearly dividend per share, the price and the 5-year dividend growth, or enter them yourself.
- Set your required return: the yearly return you want for the risk of owning the stock, often 7–10% for established companies.
- Choose one stage for steady growers, or two stage for a company growing fast for some years before slowing to a long-term rate.
The Gordon growth model
The dividend discount model values a share as the present value of all its future dividends. If the dividend grows at a constant rate g forever and you require a return r, the sum simplifies to:
value = D0 × (1 + g) / (r − g)Example: a $2.00 dividend growing 5% a year, with an 8% required return, is worth 2.00 × 1.05 / (0.08 − 0.05) = $70. At a price of $60 the stock trades about 14% below that value.
The two-stage model
Few companies grow at one rate forever. The two-stage model uses a higher growth rate for the first years, then a lower long-term rate (often near inflation or GDP growth, 2–4%):
value = Σ D0(1+g1)^t / (1+r)^t (t = 1..N) + D_N × (1+g2) / (r − g2) / (1+r)^NReading the result backwards
Instead of guessing growth, ask what the price already assumes. The growth priced in today is the steady growth rate that makes the model equal the market price at your required return; the return implied by the price is roughly the dividend yield plus growth. If the priced-in growth looks too high for the business, the stock may be expensive; if it looks low, it may be cheap.
Limits
- Very sensitive. When growth gets close to the required return, the value shoots up; the sensitivity table shows how much it moves.
- Only for dividend payers. It ignores buybacks and retained earnings, so it undervalues companies that return cash in other ways.
- Growth must be lower than the required return in the long run, or the formula breaks down.
For projections of your own dividend income, see the dividend & DRIP calculator.
Frequently asked questions
What is the dividend discount model?
A way to value a stock as the present value of all the dividends it will pay. With constant growth it becomes the Gordon growth formula: value = next year's dividend ÷ (required return − growth).
What required return should I use?
The yearly return you want for the risk. Many investors use 7–10% for large, stable companies; a common approach is the long-term bond yield plus an equity risk premium of about 4–6%.
What growth rate should I use?
The lookup fills in the stock's 5-year dividend growth. For the long term, rates above 4–6% are hard to sustain; the two-stage model lets you use a higher rate for the first years and a lower one after.
Why does the model give no value?
Growth must be lower than the required return, otherwise the formula breaks down (the dividends would be worth an infinite amount). Lower the growth or raise the required return.
What is the growth priced in today?
The constant growth rate that makes the Gordon model equal to the current price at your required return: g = (r × P − D) ÷ (P + D). It shows what the market assumes.
Does the DDM work for stocks without dividends?
No. Use earnings-based methods such as the Graham number or a discounted cash flow model instead.
Can I put this calculator on my website?
Yes. It is free for any site. Use the embed code generator at the bottom of this page, copy the code and paste it into your page. Please keep the credit line with the two links under the calculator.
Related calculators
- Graham Number CalculatorBenjamin Graham’s fair value from earnings and book value, with the margin of safety and his tests.
- Dividend Income CalculatorYearly and monthly dividend income from your stocks and ETFs, with a month-by-month calendar.
- Dividend & DRIP CalculatorFuture dividend income, yield on cost and how much reinvesting dividends adds.
- Bond Yield to Maturity CalculatorYield to maturity, current yield, yield to call and duration from a bond’s price, coupon and maturity.
See all free investing calculators, or add live stock quotes to your site with the free stock widgets.
Add this calculator to your website
The calculator is free to embed on any website, personal or commercial, and works on WordPress, Blogger, Wix, Squarespace, Webflow, Ghost and plain HTML. Choose the options, copy the code and paste it into your page.
Preview: this is how the calculator and the credit line will look on your page
Free for personal and commercial websites. Please keep the “by Quotelinks” credit line under the calculator visible and unchanged, and don’t modify the calculator or present it as your own. The <script> line is optional: it sizes the frame to fit the calculator; if your platform removes scripts, the calculator still works at the fixed height. Valuation models depend heavily on their assumptions. For illustration only, not financial advice.