Dividend Discount Model (DDM) Calculator
Value a dividend-paying stock using the Gordon Growth Model.
Enter the current dividend, required return, and dividend growth rate to estimate intrinsic value.
The Dividend Discount Model values a stock based on the present value of all future dividends it will pay. The Gordon Growth Model is the simplest version: it assumes dividends grow at a constant rate forever.
P = D1 / (r - g)
Where D1 is next year’s dividend (current dividend x (1 + growth rate)), r is your required annual return, and g is the constant dividend growth rate. Both r and g are in decimal form.
If a stock pays a $2.00 annual dividend, you expect dividends to grow at 4% per year, and you require an 8% return:
D1 = $2.00 x 1.04 = $2.08 P = $2.08 / (0.08 - 0.04) = $52.00
If the stock trades below $52.00, it is undervalued by this model. Above $52.00, overvalued.
The critical constraint: r must be greater than g. If growth equals or exceeds the discount rate, the formula produces an infinite or negative result, which signals the model breaks down. This is common for high-growth companies that pay no dividend, and the DDM simply does not apply to them.
The model is most useful for stable, mature dividend payers: utilities, consumer staples companies, banks with long dividend histories. It works poorly for growth companies, cyclicals, or any firm where dividends are not the primary return to shareholders.
Required return (r) is usually estimated using CAPM: risk-free rate plus beta times the equity risk premium. The dividend yield at your estimated intrinsic value is D1 / P, which should be lower than r by the growth rate g.
Enter a current market price to see instantly whether the stock is above or below intrinsic value.
The thing to watch: r minus g is the whole model. The denominator is a small number made of two large ones, so a small error in either moves the answer enormously. At an 8% required return, a stock growing dividends at 4% is worth D1/0.04. Nudge growth to 6% and it is worth D1/0.02, which is double. Nudge it to 7% and it has quadrupled. Nothing else on this page matters as much, and the calculator now shows you that spread rather than leaving you with one confident-looking figure.
That sensitivity is also the honest argument against the model. If shifting one assumption by a point can double the answer, the answer is a range, and a fairly wide one.
How we build and check this calculator
This calculator runs entirely in your browser, so the numbers you enter stay on your device. The math behind it is written by hand and tested against worked examples and standard references before the page goes live.
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