Dividend Discount Model (DDM) Calculator
Estimate the intrinsic value of a stock using the Gordon Growth Model (constant-growth dividend discount model). Enter the next dividend, required return, and dividend growth rate to find fair value per share.
How to use this tool
- Enter next expected dividend (d1), required rate of return (r) and constant dividend growth rate (g) in the fields above.
- Results update instantly as you type — or click Calculate.
- Read your intrinsic value per share and the full breakdown beneath it.
⚠ This tool provides general estimates for education only and is not financial, tax or legal advice. Figures may not reflect your situation — verify with a qualified professional.
Formula
Gordon Growth Model: P = D1 / (r − g)
Where D1 is next year's dividend, r is the required rate of return, and g is the constant dividend growth rate. Requires r > g.
How it works
The dividend discount model (DDM) values a stock as the present value of all future dividends. The Gordon Growth Model assumes dividends grow at a constant rate indefinitely, reducing the infinite series to a simple formula: price equals next dividend divided by the difference between the required return and growth rate. The model is most appropriate for mature, dividend-paying companies with stable, predictable growth.
Worked example
Utility Stock Valuation
- Next dividend D1: $2.00; Required return r: 10%; Growth rate g: 4%
- Spread = r − g = 10% − 4% = 6% = 0.06
- Intrinsic value = D1 / (r − g) = $2.00 / 0.06 = $33.33
The intrinsic value of the stock is $33.33 per share. If the current market price is below this, the stock may be undervalued.
Common mistakes to avoid
- Using a dividend growth rate g equal to or greater than the required return r, which makes the denominator zero or negative and produces an undefined or negative stock price -- the Gordon Growth Model requires r > g.
- Entering the most recent dividend paid (D0) instead of the next expected dividend (D1), understating intrinsic value by a factor of (1 + g).
- Applying the constant-growth model to companies with irregular or rapidly growing dividends, where the steady-state assumption is violated and the output is unreliable.
Key terms
- What is the required rate of return?
- The required rate of return (r) is the minimum annual return an investor demands to hold a stock, reflecting the investment's risk and opportunity cost of capital.
- Why must r be greater than g?
- If g is equal to or greater than r, the formula produces a zero or negative denominator, making the result infinite or negative, which is economically meaningless. The Gordon Growth Model only works when the growth rate is strictly less than the discount rate.
- What is D1 vs D0?
- D0 is the most recently paid dividend. D1 is the next expected dividend, typically calculated as D0 × (1 + g). The DDM formula uses D1, the forward-looking dividend.
- What are limitations of the DDM?
- The DDM requires dividends, assumes constant perpetual growth, and is highly sensitive to small changes in r and g. It is less suitable for growth stocks that pay no dividends or have volatile payouts.
Frequently asked questions
- What does the DDM tell me about a stock?
- The Gordon Growth Model estimates intrinsic value as the present value of all future dividends growing at a constant rate forever. If intrinsic value exceeds the current market price, the stock may be undervalued. The model is most reliable for mature, dividend-paying companies with stable growth.
- How do I estimate the dividend growth rate?
- Common approaches: (1) historical average dividend growth rate, (2) sustainable growth rate = ROE x Retention Ratio, or (3) analyst consensus long-term EPS growth estimates, assuming the payout ratio stays stable.
- What are the main limitations of the DDM?
- The DDM cannot value companies that pay no dividends, is highly sensitive to small changes in the r - g spread, and assumes constant growth in perpetuity. It works best for utilities, REITs, and mature consumer staples with predictable dividend streams.