Dividend Discount Model (DDM) Calculator
Using the Gordon Growth Model, estimate a stock's intrinsic value from next dividend, required return and dividend growth.
Input Data
Results
At a glance:DDM (Gordon Growth): stock value = D1 / (r - g), where D1 = next dividend, r = required return, g = perpetual dividend growth. It discounts all future dividends to today. Suits stable, predictable dividend payers (utilities, banks). If market < intrinsic, theoretically undervalued. WARNING: Requires r > g (else formula breaks); assumes perpetual constant growth; r and g subjective and highly sensitive — do sensitivity analysis, cross-check with P/E, DCF. Education, not advice.
Formula
P = D1 / (r − g), where D1 = next dividend, r = required return, g = perpetual dividend growth.
Requires r > g; as g → r the valuation rises non-linearly (highly sensitive).
$$P_0 = \dfrac{D_1}{r - g}$$How to Use
- Enter expected next-year dividend (D1).
- Enter required return (must exceed growth).
- Enter perpetual growth rate to view intrinsic value.
FAQ
Why must required return exceed dividend growth?
Because the denominator is (r - g). If g ≥ r, the denominator is zero or negative, giving infinite or negative — meaning 'dividends grow forever at or above the discount rate', the present value diverges and the formula fails. Economically, no company can grow faster than the required return forever. Ensure r > g; for high-growth firms use multi-stage DDM or other models.
What companies does DDM suit?
The Gordon model best fits mature companies with stable, moderate, predictable dividends — utilities, large banks, telecom, REITs with steady cash flows and long payout records. Their future dividends are reasonable to forecast and the assumptions hold. It is unsuitable for non-paying growth stocks (tech), erratic cyclical payers, or high-expansion firms with unstable growth — use DCF or relative valuation there.
Why is the result so sensitive to assumptions?
Because the denominator (r - g) is usually small, and dividing by a small number amplifies the numerator. Example: D1=3, r=10%, g=4% → denom 6%, value 50; if g=5%, denom 5%, value jumps to 60 — a one-point growth change moves value 20%. The closer g to r, the more extreme. Never rely on a single number; sensitivity-analyse r and g, cross-check with other methods.
How should I set the required return r?
r is the minimum annual return you (or the market) require, commonly estimated by CAPM: r = risk-free rate + Beta x market risk premium. Higher risk/Beta → higher r. You can also use peer historical returns or the firm's cost of equity. Higher r means a stricter requirement and lower intrinsic value for the same dividends. Because r is subjective, set a reasonable range (e.g. 8%-12%) and view the valuation band, not a single point.
What if the company has multiple growth stages?
The single-stage Gordon model handles only one constant perpetual growth rate, unsuitable for high-expansion-then-mature firms. Use a multi-stage DDM: discount the high-growth period (e.g. first 5 years) dividends year by year, then use Gordon to estimate the terminal value of the stable period and discount it back; sum both for intrinsic value. This matches DCF terminal-value logic. This calculator focuses on the classic single-stage case for mature stable stocks; for growth firms, stage it or use DCF.
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References
Content review: Calculatorism Finance Team. Results are for reference only; please refer to the relevant authorities for the official figures.