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Gordon Growth Model Calculator

Value a dividend stock with the Gordon growth model.

How it is calculated

The Gordon growth (dividend discount) model values a stock as a growing perpetuity: P = D1 ÷ (r − g). D1 is next year's expected dividend per share, r the required annual return in %, and g the constant annual dividend growth rate in %. The tool divides D1 by (r − g) ÷ 100 and also shows r − g as the yield used. The model only makes sense when r is greater than g and the dividend is not negative; otherwise there is no result. Because the value is so sensitive to r − g, a small change in either rate moves the price a lot. Value is displayed in dollars.

Worked example

Next year's dividend D1 = 2.5, required return 9%, growth 4%. The yield used is 9% − 4% = 5.00%. Fair value = 2.5 ÷ 0.05 = $50.00 per share.

Try this example →

Common mistakes

  • Entering the current dividend instead of next year's: D1 = D0 × (1 + g).
  • Using a growth rate at or above the required return, which breaks the model (the tool returns nothing).
  • Typing percentages as decimals (0.09 instead of 9).
  • Applying the model to a company that pays no dividend or whose dividends are erratic.
  • Using an optimistic growth rate that could not continue forever; long-run g cannot exceed the economy's growth for ever.

Sources

About this calculator

This calculator values a dividend-paying stock using the Gordon growth model (also called the dividend discount model): P = D₁/(r − g), where D₁ is next year's expected dividend, r is the required rate of return, and g is the dividend's expected constant growth rate.

Equity analysts and dividend investors use it to estimate a stock's intrinsic value from its dividend stream alone, most reliably for mature, stable-growth companies like utilities where dividends grow predictably.

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Comments (1)

  • Editorial team

    The model is touchy where the two rates get close. In the 2.50 dividend case, growth of 4 percent against a 9 percent return gives 50.00, but raising growth to 5 percent gives 62.50, a quarter more from one point. It also suits only firms with stable, steadily growing dividends, and a growth rate above the long-run economy is hard to justify forever. What growth rate do you use, and how do you choose it?

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