What is the dividend discount model?

The dividend discount model (DDM) values a stock as the present value of all its future dividends. The most common single-stage version is the Gordon Growth Model, which assumes dividends grow forever at a constant rate. It is a quick way to estimate a fair value for a stable dividend payer.

What is the Gordon Growth Model formula?

Fair value = D₁ ÷ (r − g), where D₁ is next year’s expected dividend (this year’s dividend × (1 + g)), r is your required rate of return, and g is the perpetual dividend growth rate. For example, a $2.10 forward dividend with a 9% required return and 5% growth gives 2.10 ÷ 0.04 = $52.50.

Why does growth have to be below the required return?

If the growth rate equals or exceeds your required return, the formula divides by zero or a negative number and produces an infinite or nonsensical value. The model only works when r is greater than g, which is why a perpetual growth rate above ~your long-run return is unrealistic.

What required return should I use?

Many investors use their personal hurdle rate or an estimate of the stock’s cost of equity (often 8–12% for mature companies). A higher required return lowers the fair value. Because the result is sensitive to this input, it is worth testing a range.

What are the limitations of the DDM?

It only suits companies that pay a steady, predictably growing dividend — not high-growth or non-paying stocks. It is highly sensitive to the growth and required-return assumptions, so treat the output as one input among many, not a precise price target.

Dividend Discount Model Calculator

Estimate what a dividend stock is worth with the Gordon Growth Model — from its dividend, growth rate, and the return you require.

Model inputs

Current annual dividend (per share)

The most recent 12 months of dividends per share (D₀).

Required rate of return

The annual return you demand to hold the stock.

Dividend growth rate

% / yr

Expected long-run annual dividend growth. Must be below your required return.

Current share price (optional)

Estimated fair value per share

$52.50

Undervalued vs fair value

Next-year dividend (D₁)

$2.10

Upside to fair value

16.67%

Current price

$45.00

The Gordon Growth formula

Fair value = D₁ ÷ (r − g) = $2.10 ÷ (9% − 5%) = $52.50

The model assumes dividends grow forever at a constant rate, so it suits stable, mature dividend payers — not high-growth or non-paying stocks. Small changes to the growth or required-return assumptions move the fair value a lot, so treat the output as a sensitivity tool, not a precise price target.

For educational purposes only. A model estimate is not a valuation or a recommendation to buy or sell. Not financial advice.

How the dividend discount model works

The single-stage DDM, or Gordon Growth Model, says a stock is worth the present value of an infinite stream of growing dividends. That simplifies to fair value = D₁ ÷ (r − g), where D₁ is next year’s dividend, r is your required return, and g is the perpetual growth rate.

The calculator computes D₁ as this year’s dividend grown by g, then divides by the gap between r and g. Because that gap sits in the denominator, the value is very sensitive to both inputs — nudging growth a point closer to your required return can swing the fair value sharply. Enter a current price and the tool flags whether the stock looks under- or over-valued against the model.

The model only works for steady dividend growers where r is greater than g. For high-growth or non-paying stocks it breaks down. Pair it with the payout ratio to sanity-check that the dividend is sustainable and the dividend growth calculator to test your growth assumption.

Frequently asked questions

What is the dividend discount model?: The dividend discount model (DDM) values a stock as the present value of all its future dividends. The most common single-stage version is the Gordon Growth Model, which assumes dividends grow forever at a constant rate. It is a quick way to estimate a fair value for a stable dividend payer.
What is the Gordon Growth Model formula?: Fair value = D₁ ÷ (r − g), where D₁ is next year’s expected dividend (this year’s dividend × (1 + g)), r is your required rate of return, and g is the perpetual dividend growth rate. For example, a $2.10 forward dividend with a 9% required return and 5% growth gives 2.10 ÷ 0.04 = $52.50.
Why does growth have to be below the required return?: If the growth rate equals or exceeds your required return, the formula divides by zero or a negative number and produces an infinite or nonsensical value. The model only works when r is greater than g, which is why a perpetual growth rate above ~your long-run return is unrealistic.
What required return should I use?: Many investors use their personal hurdle rate or an estimate of the stock’s cost of equity (often 8–12% for mature companies). A higher required return lowers the fair value. Because the result is sensitive to this input, it is worth testing a range.
What are the limitations of the DDM?: It only suits companies that pay a steady, predictably growing dividend — not high-growth or non-paying stocks. It is highly sensitive to the growth and required-return assumptions, so treat the output as one input among many, not a precise price target.

Related calculators

Dividend Growth Rate Calculator

Measure the growth rate (g) the model needs from past dividends.

Dividend Growth Calculator

Project how the dividend itself grows over time.

Dividend Yield Calculator

Current yield from a dividend and a price.

Dividend Payout Ratio Calculator

Check whether the dividend is sustainable.

Dividend Calculator

Project portfolio growth with reinvested dividends.