Dividend Discount Model Calculator
Calculate stock value using the Gordon Growth Model (GGM) based on expected dividends and growth rates
Calculate DDM Stock Value
Dividend Information
Most recent annual dividend per share
Cost of Equity (CAPM)
10-year government bond yield
Market return - risk-free rate
Stock's market risk measure
DDM Calculation Results
Valuation Analysis
Example Calculation
Company X Example
Current Dividend: $6.00 per share
Payout Ratio: 60%
ROE: 10%
Risk-free Rate: 3%
Market Risk Premium: 7%
Beta: 1.0
Step-by-Step
1. Growth Rate: g = (1 - 0.60) × 0.10 = 4%
2. Expected Dividend: D₁ = $6.00 × 1.04 = $6.24
3. Cost of Equity: r = 3% + 1.0 × 7% = 10%
4. Stock Value: P₀ = $6.24 ÷ (10% - 4%) = $104.00
DDM Model Components
Expected Dividend
Next year's dividend payment
D₁ = D₀ × (1 + g)
Cost of Equity
Required rate of return
r = Rf + β × (Rm - Rf)
Growth Rate
Sustainable dividend growth
g = (1 - Payout) × ROE
DDM Investment Tips
Works best for mature, dividend-paying companies
Requires stable, predictable dividend growth
Growth rate must be less than cost of equity
Compare DDM value with market price
Not suitable for non-dividend paying stocks
Understanding the Dividend Discount Model
What is the DDM?
The Dividend Discount Model (DDM) is a valuation method that calculates stock value based on the present value of expected future dividend payments. The Gordon Growth Model (GGM) is the most popular variant, assuming dividends grow at a constant rate perpetually.
Key Assumptions
- •Company pays dividends regularly
- •Dividend growth rate is constant
- •Growth rate is less than required return
- •Dividends are the primary source of value
DDM Formula Breakdown
P₀ = D₁ ÷ (r - g)
Stock Value = Expected Dividend ÷ (Cost of Equity - Growth Rate)
- P₀: Current stock value
- D₁: Expected dividend next year
- r: Required rate of return (cost of equity)
- g: Constant dividend growth rate
CAPM for Cost of Equity: r = Rf + β × (Market Risk Premium)
When to Use DDM
- ✓Mature companies with stable dividends
- ✓Utilities and consumer staples
- ✓REITs and income-focused investments
- ✓Companies with predictable cash flows
Limitations
- ✗Not suitable for growth stocks without dividends
- ✗Assumes constant growth rate forever
- ✗Sensitive to small changes in assumptions
- ✗Ignores potential capital appreciation