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The Gordon Growth Model (a form of the Dividend Discount Model) estimates a stock's intrinsic value based purely on its expected future dividends, assuming those dividends grow at a constant rate forever — a classic, foundational valuation approach for stable, mature, dividend-paying companies.
How it works
Enter the expected dividend next year, the required rate of return an investor demands for the stock's risk level, and the expected constant long-term dividend growth rate. The calculator applies P = D₁ ÷ (r − g), where the required return must exceed the growth rate for the formula to produce a meaningful (finite, positive) result.
- Enter expected next-year dividend (D1, $).
- Enter required rate of return (%).
- Enter constant dividend growth rate (%).
- Click Calculate to see your results.
Examples
A stable dividend payer
A stock expected to pay a $2 dividend next year, with a 10% required return and 4% constant growth rate, has an intrinsic value of about $33.33 under this model.
Who should use it
- Valuing stable, mature dividend-paying stocks.
- Investment analysis and equity research coursework.
Industry applications
- Investment analysis and equity research
- Corporate finance and valuation
Advantages
- Simple, transparent, well-established valuation approach for stable dividend-paying stocks.
- Directly ties value to the cash flows (dividends) an investor actually receives.
Limitations
- Highly sensitive to the growth-rate assumption — small changes in "g" can swing the calculated value substantially, especially when r and g are close together.
Common mistakes to avoid
- Applying this model to high-growth or non-dividend-paying companies, where the constant-growth-forever assumption clearly doesn't hold.
- Using an overly optimistic growth rate close to or above the required return, which the model correctly flags as invalid rather than silently producing a misleading result.
Best practices
- Only apply this model to genuinely mature, stable dividend payers where constant long-term growth is a reasonable assumption.
- Use the CAPM Calculator to estimate a defensible required rate of return input, rather than guessing a number.
Tips
- Use the CAPM Calculator first to estimate a defensible required-return input, then feed it into this model for a more complete, connected valuation workflow.