Dividend Discount Model Calculator
Calculate the intrinsic value of dividend-paying stocks using the Dividend Discount Model (DDM). This calculator uses the Gordon Growth Model to determine if a stock is undervalued or overvalued.
Gordon Growth Model
DDM Valuation Results
Intrinsic Value:
$0.00
Current Market Price:
$0.00
Valuation:
N/A
Valuation Analysis
Upside/Downside:
0.00%
Margin of Safety:
0.00%
Fair Value Range:
N/A
Business Insights
Growth Assessment:
N/A
Risk Level:
N/A
Investment Decision:
N/A
Understanding the Dividend Discount Model
The Dividend Discount Model (DDM) is a quantitative method used to predict the price of a company's stock based on the theory that its stock is worth the sum of all of its future dividend payments, discounted back to their present value.
Gordon Growth Model Formula
Basic Formula
- P0 = D1 / (r - g)
- P0 = Intrinsic value per share
- D1 = Expected dividend next year
- r = Required rate of return
- g = Dividend growth rate
Assumptions
- Dividends grow at constant rate forever
- Required return > growth rate
- Company pays dividends
- Growth rate is stable and predictable
DDM Variations
Model Types
Different approaches to dividend valuation
Single-Stage DDM
- Gordon Growth Model
- Constant growth rate
- Simple and widely used
- Best for mature companies
Multi-Stage DDM
- Different growth phases
- High growth then stable growth
- More complex calculations
- Better for growth companies
DDM Applications
Stock Valuation
- Determine intrinsic value
- Compare to market price
- Identify undervalued stocks
- Long-term investment analysis
Cost of Equity
- Reverse engineer required return
- r = (D1/P0) + g
- Alternative to CAPM
- Based on market consensus
DDM Limitations
| Limitation | Description | Impact | Solution |
|---|---|---|---|
| No Dividends | Growth companies don't pay dividends | Model cannot be applied | Use other valuation models |
| Unstable Growth | Growth rates fluctuate | Inaccurate valuations | Use multi-stage model |
| Market Efficiency | Assumes market efficiency | May not reflect reality | Use with other methods |
When to Use DDM
Ideal Candidates
- Mature, dividend-paying companies
- Stable dividend history
- Predictable growth rates
- Utility and consumer staple stocks
Not Suitable For
- High-growth technology companies
- Companies without dividend history
- Cyclical or volatile businesses
- Companies with unstable cash flows
Key Takeaways for Dividend Discount Model
- DDM calculates intrinsic value as the present value of all future dividends
- The Gordon Growth Model assumes constant dividend growth: P0 = D1/(r-g)
- DDM is most appropriate for mature, dividend-paying companies
- The model cannot be used for companies that don't pay dividends
- Compare intrinsic value to market price to determine if a stock is undervalued
- DDM can be used to estimate the cost of equity capital
- Multi-stage models are better for companies with changing growth rates
- Always use DDM in conjunction with other valuation methods