Comprehensive Guide
Learn more in our Investing Guide.
How it works
The dividend discount model values a stock as the present value of its dividend stream. The Gordon growth version assumes dividends grow forever at a constant rate: fair value equals next year's dividend divided by the gap between your required return and the growth rate. The model is unforgiving about assumptions — the denominator must be positive (required return above growth) or the math breaks, and small input changes swing the output wildly: raising growth from 4% to 5% at a 9% required return lifts fair value by 20%. The engine's message is the sensitivity: a stock trading at $80 with a DDM fair value of $72 is telling you either the market expects faster dividend growth than you assumed, or it demands a lower return than yours. Use the model for stable, mature dividend payers — utilities, consumer staples, REITs — where constant growth is plausible; for high-growth companies it is noise, because dividend growth is not stable.Formula
Fair value = D1 / (required return - growth rate)
Tips
- This model fits mature, stable dividend payers only — growth stocks fail its assumptions.
- Raise the required return (discount) to reflect risk: higher discount, lower fair value.
- Compare fair value against market price, then ask what growth rate the market is implying.
- Pair with the Dividend Reinvestment (DRIP) calculator for the compounding side of the same stock.
Frequently asked questions
What is the Gordon growth model?
A dividend valuation formula: fair value equals next year's dividend divided by (required return minus dividend growth). It assumes dividends grow at a constant rate forever — hence it is only valid for mature, stable dividend payers, and the required return must exceed the growth rate.
Why is the model so sensitive to growth?
Because the denominator is a small difference between two larger numbers. At a 9% required return, growth of 5% gives a denominator of 4%; growth of 6% gives 3% — a 25% smaller denominator, so a 33% higher fair value. The formula punishes fuzzy assumptions, which is its most useful trait.
What does a market price above DDM fair value mean?
Either the market expects faster dividend growth than your input, or it requires a lower return than yours (you are more risk-averse), or the market is overpaying. The model's value is forcing that question — check which input would justify the price.
Does the model work for companies that don't pay dividends?
No — it requires a dividend stream. For non-payers, use the DCF valuation calculator, which values free cash flow instead of dividends, or the P/E ratio calculator for a market multiple view.