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Dividend Discount Model Calculator
Estimate what a dividend-paying stock is worth from the dividends it will pay. Use the single-stage Gordon growth model for steady companies, or a two- or three-stage model when dividends grow quickly before settling down. Compare the value with the share price and see how sensitive it is to your assumptions.
Last updated:
Model
$
%
Your hurdle rate, or cost of equity from CAPM.
%
Long-run growth; usually 2–4%, below economic growth.
%
years
years
$
Compare with the model value and get the implied return.
Enter your values to see the result.
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How to use the Dividend Discount Model Calculator
- Choose a model: Gordon for steady dividend growth, two- or three-stage for faster growth that slows over time.
- Enter the dividend per share and say whether it is the last 12 months (D0) or next year's estimate (D1).
- Set the required return and the stable long-run growth rate; for multi-stage models add the high-growth rate and periods.
- Add the share price to see the margin of safety and the return implied by today's price.
- Check the sensitivity grid: small changes in r or g can move the value a lot.
Dividend discount model formulas
- Gordon growth model: V = D1 ÷ (r − g), with D1 = D0 × (1 + g)
- Two-stage DDM: V = Σt=1..n D0(1 + g1)t ÷ (1 + r)t + [Dn(1 + g) ÷ (r − g)] ÷ (1 + r)n
- Three-stage DDM: like the two-stage model, but after the high-growth years growth falls in equal steps over the transition years until it reaches the stable rate g; the terminal value is taken at the end of the transition.
- Implied return (Gordon): r = D1 ÷ P + g, the dividend yield plus growth.
Worked example (two-stage)
| Input | Value |
|---|---|
| Last dividend D0 | $2.00 |
| High growth g1, years | 9% for 5 years |
| Stable growth g | 3% |
| Required return r | 8.5% |
| PV of dividends, years 1–5 | ≈ $10.14 |
| Terminal value at year 5 = 3.077 × 1.03 ÷ 0.055 | ≈ $57.63, PV ≈ $38.33 |
| Intrinsic value | ≈ $48.46 |
Tips for better DDM estimates
- Use the DDM for stable, dividend-focused companies: utilities, consumer staples, banks, insurers.
- Keep stable growth below the required return and below long-run nominal GDP growth.
- Check that the high-growth rate is consistent with the payout ratio and ROE (sustainable growth = ROE × retention).
- Look at how much of the value comes from the terminal value; if it is over 75%, your stable-stage assumptions drive almost everything.
- This is an educational estimate, not investment advice.
Frequently asked questions
What is the dividend discount model?
The dividend discount model (DDM) values a stock as the present value of all its future dividends, discounted at the return you require. If you expect $2.06 next year growing 3% forever and require 8.5%, the stock is worth $2.06 ÷ (0.085 − 0.03) = $37.45.
What is the Gordon growth model formula?
P = D1 ÷ (r − g), where D1 is next year's dividend, r the required return and g the constant growth rate. If you only know the last dividend D0, use D1 = D0 × (1 + g). The growth rate must be lower than the required return.
When should I use a multi-stage DDM?
Use a two- or three-stage model when a company is growing its dividend faster than it can sustain forever. Dividends are forecast year by year during the fast-growth period, and a Gordon terminal value captures everything after. The three-stage model fades growth gradually instead of dropping it in one step.
How do I choose the required rate of return?
Use your own hurdle rate or the cost of equity from CAPM: risk-free rate + beta × equity risk premium. Typical values for large, stable companies are 7–10%. Higher-risk companies deserve a higher rate, which lowers the value.
What growth rate should I use for the stable stage?
The stable rate is assumed to last forever, so it should not exceed long-run economic growth; 2–4% is common. You can also estimate sustainable growth as ROE × retention ratio for mature companies.
Why is the value so sensitive to r and g?
In the Gordon formula the denominator is r − g. When the gap is small, a 0.5-point change can shift the value by 15–25%. That is why the calculator shows a sensitivity grid: treat the result as a range, not a precise price.
Does the DDM work for companies that don't pay dividends?
Not directly. For non-payers or companies that return cash mainly through buybacks, a discounted cash flow model based on free cash flow is more suitable.
Are all the tools on FreeToolCabin tested for quality and accuracy?
Yes! Every tool on our site undergoes automated Q/A testing in real browser environments to ensure high precision, correct output, and zero errors. If you happen to spot a bug or have a suggestion, please contact us at [email protected] and our team will review it right away.
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