About the Dividend Discount Model Calculator
This dividend discount model (DDM) calculator estimates what a dividend-paying stock is worth today as the present value of all its future dividends. Choose the single-stage Gordon growth model for mature companies with steady dividend growth, or the two-stage model for companies expected to grow dividends quickly for a few years before settling into a long-run rate.
Enter the latest annual dividend per share, your required rate of return (for example from the CAPM), the long-term growth rate and, for the two-stage model, the high-growth rate and how many years it lasts. Add the current share price to see the upside or downside versus intrinsic value and the return the market price implies.
The DDM only works when the required return is above the long-term growth rate, and it is very sensitive to both inputs — a one-point change can move the value by a third or more. It suits utilities, banks, consumer staples and other stable dividend payers far better than companies that pay little or no dividend.
With the default inputs, the intrinsic value per share is $65.00. Change any value above to recalculate instantly.
How to use the dividend discount model calculator
- 1Choose the Gordon growth model or the two-stage model.
- 2Enter the latest full-year dividend per share.
- 3Enter your required return — the CAPM or a target return of 7%–10% is common.
- 4Enter the long-term growth rate (usually no higher than long-run GDP growth, about 2%–5%).
- 5For two-stage, add the near-term growth rate and how many years it lasts, then compare value with the price.
Formula and method
The dividend discount model values a share as the present value of every dividend it will ever pay, discounted at the investor’s required return r. When dividends grow at a constant rate g forever, that infinite sum collapses to the Gordon growth formula: next year’s dividend D₁ = D₀(1 + g) divided by (r − g). It requires r > g.
The two-stage model discounts each dividend explicitly during a high-growth period of n years at rate g₁, then adds a terminal value at year n computed with the Gordon formula using the stable growth rate g, discounted back n years. The “implied return” rearranges the Gordon formula to r = D₁ ÷ P + g: the dividend yield plus growth that the current price offers.
- V₀
- Intrinsic value per share today
- D₀, D₁
- Latest annual dividend and next year’s dividend
- r
- Required rate of return (cost of equity)
- g, g₁
- Stable growth rate and high-growth rate
- n
- Years of high growth
Worked examples
Gordon growth: $2.50 dividend, 8% required, 4% growth
Next year’s dividend is $2.50 × 1.04 = $2.60. Dividing by 8% − 4% = 4% gives an intrinsic value of $65.00, about 8.3% above a $60 price. Equivalently, at $60 the stock offers a 4.33% yield plus 4% growth = an 8.33% expected return.
Two-stage: 10% growth for 5 years, then 4%
Dividends grow from $2.75 to $4.03 over five years, worth $13.21 today. The year-5 terminal value is $4.0263 × 1.04 ÷ 4% = $104.68, worth $71.25 today. Together the share is worth about $84.46, with 84% of the value coming from beyond year five.
Utility stock: $3.80 dividend, 7% required, 2.5% growth
D₁ = $3.80 × 1.025 = $3.895, divided by 7% − 2.5% = 4.5% gives $86.56 a share. At $80 the stock offers a 4.87% yield plus 2.5% growth, an expected return of 7.37%.
Frequently asked questions
What is the dividend discount model?+
The DDM values a stock as the present value of all future dividends per share, discounted at the investor’s required rate of return. The most common version, the Gordon growth model, assumes dividends grow at a constant rate forever: value = next year’s dividend ÷ (required return − growth).
Why does the DDM fail when growth is higher than the required return?+
If g ≥ r, each discounted future dividend is as large as or larger than the one before, so the infinite sum never converges and the formula gives a negative or infinite value. Use a two-stage model with a temporary high-growth period and a long-term rate below r.
What required rate of return should I use?+
Many analysts use the CAPM: risk-free rate + beta × equity risk premium, which typically gives 7%–10% for large stable companies. You can also use your own target return; the model then tells you the most you should pay to earn it.
Which stocks is the DDM good for?+
It works best for mature companies with long, stable dividend records and payout policies, such as utilities, consumer staples, REITs and large banks. It is unreliable for companies that pay small or irregular dividends, buy back shares instead, or are growing fast.
How sensitive is the dividend discount model?+
Very. In the Gordon model, moving the spread between r and g from 4% to 3% raises the value by a third. Use the sensitivity table to see a range of values instead of relying on a single number.
Results are estimates for educational purposes and are not financial advice. Rates, fees and terms vary — confirm with your lender or a licensed advisor before making decisions.