Dividend Discount Model Calculator
Estimate a share value with the Gordon growth formula using an annual dividend, constant growth assumption, required return on equity, and current price.
How the dividend discount model works
Enter the annual base dividend per share, annual growth rate, required return, and current share price. Use the same currency and per share basis for the dividend and price. The tool does not convert currencies.
The model projects the entered annual base dividend one year forward to get D1. It divides D1 by the difference between the cost of equity and growth to estimate a constant growth value per share.
The price gap compares current price with modeled value as a percentage of modeled value. The forward dividend yield divides D1 by current price. Neither output includes price appreciation, taxes, or fees.
Compare several growth and required return assumptions, especially when the difference between them is small. A small change can produce a large change in modeled value.
Step by step
- Enter the annual base dividend, growth rate, required return, and current share price.
- Use a consistent currency for dividend and price. No currency conversion is performed.
- Review next year dividend, modeled value, price gap, and forward dividend yield.
Worked example
Example inputs: annual base dividend D0 of 2 USD per share, annual growth of 3%, required return of 8%, and current share price of 35 USD.
The next annual dividend D1 is 2.06 USD per share and the Gordon model value is 41.20 USD per share. The price gap is 15.04854% of model value and the forward dividend yield at the entered price is 5.885714%. The result falls within the calculator’s middle comparison range.
When to use this calculator
Use this model for a dividend paying company when you want to test one constant annual growth assumption against a required return. It is most interpretable when the dividend and price use the same per share currency basis and growth is stable enough to serve as a scenario assumption.
Compare several assumptions and review the formula limits before interpreting the result. The model does not establish a fair price, predict a payment, or account for every source of company value.
Common input errors
Enter rates in percentage points: 3 means 3%, not 0.03%. Growth must be above negative 100%. Required return must be positive and greater than growth. The formula becomes highly sensitive when the two rates are close.
Enter an annual dividend per share and a current price per share in the same currency. The forward dividend yield uses next year dividend divided by current price. It is not a yield on your purchase cost or a total return measure.
Gordon growth formula
Convert entered growth and cost of equity percentages to decimals: g = growth rate ÷ 100, r = cost of equity ÷ 100
Next annual dividend D1 = annual base dividend D0 × (1 + g), paid one year after the base dividend
Modeled value per share = D1 ÷ (r − g), when r > g and r > 0
Price gap = (modeled value − current price) ÷ modeled value × 100, when modeled value > 0
Forward dividend yield = D1 ÷ current price × 100, when current price > 0
Enter growth and cost of equity as percentage points: 3 means 3%. The cost of equity is the required return on equity, not WACC. Growth must be above negative 100%, and cost of equity must be positive and greater than growth. The annual base dividend and current price must use the same currency and per share units.
Model limits and assumptions
This is a one stage constant growth dividend model, not a forecast. It assumes a dividend grows at one fixed annual rate indefinitely and that the required return stays above the growth rate and above zero. The annual base dividend is an input assumption, not a verified record of dividends paid or a forecast. The model excludes changing growth, dividend cuts, taxes, fees, buybacks, and other sources of company value. A zero dividend produces a zero dividend model value, not a conclusion that the whole company is worthless. The price gap is undefined when modeled value is zero, and forward yield is undefined when share price is zero. The entered dividend and price must use the same currency and per share basis.
Key terms
- Price gap as a share of model value
- The difference between modeled value and current price, divided by modeled value. A positive percentage means price is below model value. It is a formula comparison, not a measure of safety.
- Cost of equity
- The annual return required by equity investors, used to discount the next annual dividend. It must be positive and above the entered growth rate.
- Next annual dividend
- The annual base dividend grown once by the entered rate: D1 = D0 × (1 + g). The input is not verified dividend history or a forecast.
Compare related valuation questions
PEG Ratio Calculator compares price to earnings and an entered growth rate. It does not estimate value from dividends. Use it when a dividend model does not fit the company.
Two Stage DDM models a separate high growth period before stable growth. DRIP Momentum illustrates reinvested dividend accumulation. These tools use different assumptions and outputs.
FAQ
What does the Gordon growth formula estimate?
It estimates a per share value from the next annual dividend, a constant annual growth assumption, and a required return. The formula assumes that this single growth rate continues indefinitely. It does not calculate a complete company value from all possible sources of cash flow.
What is the annual base dividend input?
It is the annual dividend per share you choose as D0. The model grows that amount once to calculate D1. If you enter a dividend from a quote source, treat it as an indicated annual amount unless you separately verify its period and basis. The tool does not validate a dividend history or future payment.
Why must cost of equity exceed growth?
The denominator is cost of equity minus growth. The constant growth value is defined only when cost of equity is positive and greater than growth. When the rates are close, the denominator is small and the modeled value is highly sensitive to small input changes.
Can I enter a negative growth rate?
Yes. A decline above negative 100% is valid if required return remains positive and greater than growth. D1 then falls below D0. Growth of negative 100% or less is not supported because it would make the next dividend zero or negative.
What happens when the annual base dividend is zero?
The dividend model returns D1 and modeled value of zero. The price gap is undefined because it divides by modeled value. This output describes the dividend formula only and does not mean the entire company has no value.
Related tools
PEG Ratio Calculator compares a price to earnings multiple with an entered growth rate. Two Stage DDM adds a distinct period before stable growth. DRIP Momentum illustrates dividend reinvestment over time. Each tool answers a different valuation or accumulation question.