Dividend Discount Model Calculator

Calculate intrinsic stock value using the Gordon Growth Model

Gordon Growth Model: For mature companies with stable, predictable dividend growth. Best for dividend aristocrats and blue-chip stocks.
Dividend Aristocrat Presets

Select a dividend aristocrat to auto-fill current dividend and historical growth rate.

Valuation Inputs
Intrinsic Value
$52.50
Valuation
Undervalued by 5%
5.0%
Margin of Safety
$2.63
Next Year Dividend
5.0%
Implied Yield

Sensitivity Analysis

See how intrinsic value changes with different growth rates and required returns.

Valuation Matrix

r \ g 3% 4% 5% 6% 7%

Your current inputs are highlighted. Green = undervalued, red = overvalued vs current price.

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What is the Dividend Discount Model?

The Dividend Discount Model (DDM) is a fundamental stock valuation method that calculates a stock's intrinsic value based on the present value of all expected future dividend payments. The underlying principle is that a stock is worth the sum of all future cash flows (dividends) it will generate, discounted back to today's value.

The most widely used version is the Gordon Growth Model (also called the constant-growth DDM), developed by economist Myron Gordon. It assumes dividends will grow at a constant rate forever, simplifying the calculation to a single formula.

DDM works best for mature, stable companies with predictable dividend policies—like dividend aristocrats (JNJ, KO, PG) that have increased dividends for 25+ consecutive years. It's less suitable for growth stocks that don't pay dividends or companies with erratic dividend histories.

DDM Formulas

Gordon Growth Model (Constant Growth)

P₀ = D₁ / (r - g) = D₀ × (1 + g) / (r - g)
  • P₀ = Intrinsic value (fair price today)
  • D₀ = Current annual dividend
  • D₁ = Next year's expected dividend
  • r = Required rate of return (discount rate)
  • g = Dividend growth rate (must be < r)

Zero-Growth Model (Perpetuity)

P₀ = D / r

For preferred stocks or companies with constant dividends. Simply divides the annual dividend by the required return.

Two-Stage DDM

P₀ = Σ[D₀(1+g₁)ᵗ / (1+r)ᵗ] + [Dₙ(1+g₂) / (r-g₂)] / (1+r)ⁿ

For companies transitioning from high growth to stable growth. Sums the present value of high-growth dividends plus the terminal value.

Excel Formulas for DDM

Model Excel Formula
Gordon Growth =A1*(1+B1)/(C1-B1)
A1=Dividend, B1=Growth, C1=Required Return
Zero Growth =A1/B1
A1=Dividend, B1=Required Return
Margin of Safety =(A1-B1)/A1
A1=Intrinsic Value, B1=Current Price
Two-Stage (Terminal Value) =A1*(1+B1)/(C1-B1)
A1=Final high-growth dividend, B1=Terminal growth, C1=Required return

When to Use the Dividend Discount Model

DDM Works Best For

  • Dividend aristocrats (25+ years of increases)
  • Mature, stable blue-chip companies
  • Utilities and consumer staples
  • REITs (required to pay 90% of income)
  • Companies with predictable cash flows
  • Preferred stocks (fixed dividends)

DDM Not Suitable For

  • Non-dividend paying stocks (AMZN, TSLA)
  • High-growth companies reinvesting profits
  • Companies with erratic dividend history
  • Cyclical industries (volatile earnings)
  • Companies likely to cut dividends
  • Early-stage or turnaround situations

Frequently Asked Questions

The Dividend Discount Model (DDM) is a stock valuation method that calculates a stock's intrinsic value based on the present value of all future dividend payments. The most common form is the Gordon Growth Model, which assumes dividends grow at a constant rate forever. The formula is: Intrinsic Value = D₁ / (r - g), where D₁ is next year's dividend, r is the required rate of return, and g is the dividend growth rate.

To calculate intrinsic value: 1) Find the current annual dividend (D₀), 2) Estimate the dividend growth rate (g), 3) Determine your required rate of return (r), 4) Calculate next year's dividend: D₁ = D₀ × (1 + g), 5) Apply the formula: Intrinsic Value = D₁ / (r - g). For example, if D₀ = $2.00, g = 5%, and r = 10%, then D₁ = $2.10 and Intrinsic Value = $2.10 / (0.10 - 0.05) = $42.00.

A typical required rate of return ranges from 8% to 12%. Common approaches: 1) Use historical stock market returns (~10%), 2) Apply CAPM formula: Risk-Free Rate + Beta × Market Risk Premium, 3) Use your personal target return. Conservative investors might use 8-9%, while those seeking higher returns might use 11-12%. The rate should always exceed your expected dividend growth rate.

DDM limitations include: 1) Only works for dividend-paying stocks, 2) Assumes constant dividend growth (unrealistic for many companies), 3) Very sensitive to growth rate and required return assumptions, 4) Cannot value growth stocks that don't pay dividends, 5) Doesn't account for buybacks, 6) Results vary dramatically with small input changes. DDM works best for mature, stable dividend-paying companies.

DDM discounts future dividends to shareholders, while DCF discounts free cash flows to the entire firm. DDM is simpler but only works for dividend-paying stocks. DCF is more comprehensive, applicable to any company with cash flows, and captures value from reinvested earnings. DDM is essentially a subset of DCF methodology focused specifically on dividend streams.

Traditional DDM cannot value non-dividend stocks since there are no dividends to discount. Alternatives include: 1) DCF (discounting free cash flows), 2) Relative valuation (P/E, EV/EBITDA), 3) Project when dividends might start, 4) Apply DDM to theoretical dividend capacity. For growth stocks like Tesla or Amazon, DCF or relative valuation methods are more appropriate.

Margin of safety is the difference between intrinsic value and market price as a percentage: (Intrinsic Value - Market Price) / Intrinsic Value × 100%. Value investors like Benjamin Graham and Warren Buffett recommend buying stocks with a 20-30% margin of safety to protect against estimation errors and market volatility. A positive margin means the stock is undervalued.

Methods to estimate growth rate: 1) Historical CAGR of dividends over 5-10 years, 2) Sustainable growth rate: ROE × Retention Ratio, 3) Analyst consensus estimates, 4) Industry comparison. For dividend aristocrats, historical 5-year CAGR is reliable. Long-term growth rates above 6-7% are typically unsustainable—GDP growth is a natural ceiling for perpetual growth.

The two-stage DDM accounts for companies with different growth phases. Stage 1 assumes high growth for a specific period (e.g., 15% for 5 years), then Stage 2 assumes stable, lower growth perpetually (e.g., 4% forever). This is more realistic for companies transitioning from high growth to maturity. The formula sums PV of high-growth dividends plus PV of terminal value.

For Gordon Growth in Excel: =A1*(1+B1)/(C1-B1) where A1=dividend, B1=growth rate (as decimal), C1=required return (as decimal). For two-stage DDM, use NPV(rate, dividends) + terminal_value/(1+rate)^n. Always ensure r > g to avoid division errors. Use IF(C1>B1, formula, "Error") for validation.
Disclaimer: This calculator is for educational and informational purposes only. DDM valuations are highly sensitive to input assumptions and should not be the sole basis for investment decisions. Historical dividend growth does not guarantee future growth. Stock prices can decline regardless of intrinsic value calculations. Always conduct thorough due diligence and consider consulting a financial advisor before making investment decisions.

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