Dividend Discount Model Calculator

It values a stock as the present value of all its future dividends. The Gordon growth version assumes dividends grow at a constant rate, giving a fair value of next year dividend divided by the required return minus the growth rate.

The value depends on the gap between the required return and the growth rate. When the two are close the denominator becomes tiny and the estimate explodes, so the required return must comfortably exceed growth.

For the terminal growth rate of a mature company, analysts typically use 2 to 3 percent, roughly in line with long-run nominal GDP growth. A higher rate implies the company outgrows the entire economy forever, which is implausible. The rate must also stay below your required return, or the single-stage model breaks down.

It works best for mature, stable companies that pay a consistent, predictable, and growing dividend, such as utilities, consumer staples, and established banks. It breaks down for firms that pay no dividend, buy back stock instead, or have erratic payouts, because the model has no cash flows to discount.

For the perpetual (Gordon) version, the growth rate must be sustainable forever, so it cannot exceed the long-run growth of the overall economy, typically a few percent. Anchor it on the company's history of dividend increases, its payout ratio, and its return on equity, and always keep it below your discount rate or the model returns nonsense.

Because value equals next year's dividend divided by (discount rate minus growth rate), the two inputs sit in the denominator very close together. Narrowing that gap by even half a percentage point can swing the estimated value by double digits. Always run a range of assumptions rather than trusting one point estimate.