The Gordon growth model suits mature companies with steady dividend growth such as utilities and consumer staples. It is very sensitive to r − g, and doesn’t work when growth is close to or above the required return.
How to use the Dividend Discount Model Calculator
- Current dividend per share
- Dividend payout ratio
- Return on equity
- Risk-free rate
- Market risk premium
- Beta
- Current share price (for comparison)
Results update as you type, and every field accepts the units shown in its menu.
How it works
Enter the current dividend per share, the payout ratio and ROE (for growth), and the risk-free rate, market risk premium and beta (for the required return).
Tips
- Take figures from the same financial statements and the same fiscal year.
- Compare ratios with companies in the same industry, not across industries.
- Use several valuation measures together; no single ratio tells the whole story.
- Market prices change every second – refresh the share price before you rely on a result.
Common mistakes to avoid
- Mixing per-share figures with company totals.
- Using trailing earnings for one company and forward earnings for another.
- Forgetting dilution from options and convertible securities.
Inputs explained
| Field | What to enter |
|---|---|
| Current dividend per share | Amount in your currency |
| Dividend payout ratio | In % |
| Return on equity | In % |
| Risk-free rate | In % |
| Market risk premium | In % |
| Beta | A number |
| Current share price (for comparison) | Amount in your currency |
What each result means
- Expected growth rate = [Return on equity]×(1 – [Dividend payout ratio]÷100)
- Cost of equity (required return) = [Risk-free rate] + [Beta]×[Market risk premium]
- Expected dividend next year = [Current dividend per share]×(1 + [Expected growth rate]÷100)
- Upside vs current price = ([Stock value (DDM)]÷[Current share price (for comparison)] – 1)×100
Example values
How the main result changes when Current dividend per share changes and everything else stays at the example values above:
| Current dividend per share | Stock value (DDM) |
|---|---|
| 1 | 54.97 |
| 1.5 | 82.46 |
| 2 | 109.95 |
| 2.5 | 137.44 |
| 3 | 164.92 |
| 4 | 219.9 |
Formula
Growth g = ROE × (1 − payout ratio)Required return r = risk-free rate + β × market risk premiumNext dividend D₁ = D₀ × (1 + g)Stock value = D₁ ÷ (r − g)Worked example
Inputs — Current dividend per share: $2; Dividend payout ratio: 40 %; Return on equity: 12 %; Risk-free rate: 4.2 %; Market risk premium: 5.5 %; Beta: 0.9; Current share price (for comparison): $100.
Results — Expected growth rate = 7.2 %; Cost of equity (required return) = 9.15 %; Expected dividend next year = $2.14; Stock value (DDM) = $109.95; Upside vs current price = 9.95 %.
Frequently asked questions
What is the dividend discount model?
A valuation method that discounts expected future dividends.
What happens if growth exceeds the required return?
The formula breaks down – use a multi-stage model instead.
How is growth estimated?
Sustainable growth = ROE × retention ratio.
What formula does the Dividend Discount Model Calculator use?
Growth g = ROE × (1 − payout ratio).