About the DDM Calculator
The Gordon growth version of the dividend discount model compresses an infinite stream of dividends into one division. Take next year dividend, divide by the required return minus the growth rate, and the answer is what the share is worth today under those assumptions. A share that just paid 2.50, growing at 4 percent, discounted at 9 percent, values at 52.00.
Two details cause most of the mistakes. The numerator has to be next year dividend, not the one just paid, so the selector lets you say which figure you are holding and the tool grows it forward if needed. And the denominator is a subtraction of two rates that are often close together, which makes the result extremely sensitive: nudging growth from 4 to 5 percent lifts the value from 52.00 to 65.00, a 25 percent jump from a single percentage point.
Growth at or above the required return breaks the model entirely, since the series no longer converges, and the tool refuses rather than printing a nonsense number. Enter the current market price and you also get a comparison line showing whether the market sits above or below your valuation. The model only fits mature, reliably paying companies; for firms that reinvest instead of paying out, the DCF Calculator is the appropriate tool, and the required return usually comes from the CAPM Calculator.
How to use
- Say whether your dividend figure is the last paid or the next expected one.
- Enter the dividend per share and the rate you expect it to grow at each year.
- Enter the required rate of return, which must be above the growth rate.
- Optionally add the market price to see whether the share trades above or below the model value.
Common questions
- What is the dividend discount model formula?
- P0 = D1 / (r - g), where D1 is next year dividend per share, r is the required return and g is the constant growth rate.
- What happens if growth exceeds the required return?
- The formula collapses and the tool stops with a message. No company can grow its dividend faster than its discount rate forever.
- Why is the value so sensitive to the growth rate?
- The denominator is the gap between two rates. When that gap is small, a change of one percentage point moves it a long way in relative terms.
- Can I use it on a company that pays no dividend?
- No. With no dividend the numerator is zero and the model returns nothing useful, so a cash flow based valuation is needed instead.