How to use the dividend discount model calculator
The page has three tools. Pick the one that matches the company.
Gordon growth values a mature dividend payer with a single growth rate:
- Choose the dividend basis. Pick D0 if you enter the dividend paid over the last 12 months, or D1 if you have a forecast for the next 12 months. The calculator converts D0 to D1 for you.
- Enter the annual dividend per share, regular dividends only. Four quarterly payments of $0.60 are $2.40.
- Enter the long-run growth rate of the dividend. A company’s 5- or 10-year dividend growth history is a starting point, but the rate must hold forever.
- Enter your required return, usually the cost of equity.
- Add the share price if you want to see the upside and the return the price implies.
Two-stage DDM adds a period of faster growth before the stable phase. Enter the current dividend, the number of high-growth years, both growth rates and the required return.
Implied return starts from the price instead and solves for the return you would earn if the growth assumption holds.
The formulas
D1 = D0 × (1 + g)D0 is the dividend of the last 12 months, D1 the dividend of the next 12 months, r the required return and g the dividend growth rate forever. Valid only when g is below r.
The two-stage model discounts each dividend of the high-growth period and adds the Gordon value of everything after it, discounted from the end of that period:
PN = DN × (1 + g2) ÷ (r − g2)g1 is the high growth rate for years 1 to N, g2 the stable rate after year N, and PN the value of the shares at the end of year N.
Rearranging the Gordon formula gives the return the market implies: r = D1 ÷ P + g, the forward dividend yield plus growth.
A worked example
Gordon growth. Company A paid $2.40 in dividends over the past year and is expected to raise them 4% a year indefinitely. You require 8%. Next year’s dividend is $2.50, and dividing it by the 4.00% gap between return and growth gives a value of $62.40 per share, 25.0× the next dividend. At a price of $55, the model shows an upside of +13.5%, and the price itself implies a return of 8.54%.
Two-stage. Company B pays $2 and should grow its dividend 10% a year for 5 years, then 3% forever. At an 8.5% required return, the five high-growth dividends are worth $10.42 today and the stable stage adds $40.12, for a value of $50.54. The terminal stage carries 79.4% of the total.
Why small changes move the value so much
The Gordon value depends on the gap between two percentages, r − g. In the example that gap is only 4.00%, so a single point on either input changes the denominator by a quarter:
| Change from the example | Value per share |
|---|---|
| The example (growth 4%, required return 8%) | $62.40 |
| Growth 3% instead of 4% | $49.44 |
| Growth 5% instead of 4% | $84.00 |
| Required return 9% instead of 8% | $49.92 |
| Required return 7% instead of 8% | $83.20 |
One point of growth takes the value from $49.44 to $84.00. That is why the model is best used to test a price rather than to pin down a precise value: the chart under the calculator shows how quickly the value climbs as growth approaches the required return.
The two-stage model behaves the same way through its terminal stage. Cutting the stable growth rate from 3% to 2% lowers Company B’s value from $50.54 to $44.04, while stretching the high-growth phase to ten years raises it to $64.55.
Choosing the growth rate
- Check the payout ratio first. Dividends can only grow faster than earnings for a while, by paying out a larger share. A company already paying out 90% of profit has little room left.
- Link growth to reinvestment. A common cross-check is sustainable growth: return on equity times the share of earnings retained. A company earning 12% on equity and keeping half its profit can grow about 6% a year from its own resources.
- Keep the forever rate modest. No company can outgrow the economy indefinitely, so a stable rate of 2% to 4%, close to long-run economic growth, is the usual choice. Use the two-stage tab for anything faster.
Reading the implied return
The implied return tool asks a simpler question: if you buy at today’s price, what do you earn? At $50 with a $2 dividend growing 5% a year, the answer is 9.20%: a 4.20% forward yield plus 5.00% growth. If that is above the return you require, the price looks reasonable under your assumptions. It also assumes the price-to-dividend multiple stays constant, so the share price grows at the same rate as the dividend.
What this calculator does not include
The dividend discount model counts only dividends. Share buybacks, which many US companies use alongside or instead of dividends, are ignored, so the model undervalues companies that return cash that way. It also assumes dividends are paid once a year at year-end and that growth is smooth; real dividends are paid quarterly and can be cut. Taxes on dividends, which reduce what you keep, are left out. For companies with low payouts or irregular dividends, a DCF based on free cash flow is usually a better tool.