Dividend Discount Model Calculator (Gordon growth & two-stage DDM)

Understanding the dividend discount model calculator — concept and principle

This calculator values a share as the present value of its future dividends, using a two-stage dividend discount model: a first stage of higher growth, then stable growth forever. It also shows the single-stage Gordon value for comparison, next year's dividend, the share of value from the terminal value and the upside or downside versus the current price. Use it for valuing dividend-paying stocks, finance courses and testing growth assumptions.

Discount five years of fast-growing dividends, then a Gordon value for 3% growth after year 5.

How it is calculated

Stage 1: D_t = D₀ × (1 + g₁)^t for t = 1 … N, each discounted by (1 + r)^t.
Terminal value at year N = D_N × (1 + g₂) ÷ (r − g₂), discounted by (1 + r)^N.
Intrinsic value = PV of stage-1 dividends + PV of the terminal value.
Single-stage Gordon value = D₀ × (1 + g₂) ÷ (r − g₂).
Upside = value ÷ price − 1.

The principle

To a shareholder, a share is worth the cash it pays out over time. The Gordon growth model, published by Myron Gordon, shows that a dividend growing at a constant rate g forever, discounted at r, is worth D₁ ÷ (r − g). Many companies grow faster for a while before settling down, so the two-stage model values the early years one by one and then applies Gordon's formula. The result is very sensitive to r − g, and the model only works when the required return exceeds long-term growth.

Worked example

Default inputs: D₀ = $2.40, first-stage growth 8% for 5 years, long-term growth 3%, required return 9%, price $45.

D₁ = 2.40 × 1.08 ≈ $2.59; dividends rise to D₅ ≈ $3.53.
PV of stage-1 dividends ≈ $11.67.
Terminal value at year 5 = 3.53 × 1.03 ÷ (0.09 − 0.03) ≈ $60.53; PV ≈ $39.34.
Intrinsic value = 11.67 + 39.34 ≈ $51.02; terminal value is 77.1% of it.
Single-stage Gordon value = 2.40 × 1.03 ÷ 0.06 = $41.20; upside vs $45 ≈ 13.4%.

Each point is the calculator re-run with only “Dividend per share over the last 12 months” changed; the gold point is the default example. Change the inputs above and this chart follows your numbers.

Dividend per share over the last 12 months	Intrinsic value per share
0.6	$12.75
1.2	$25.51
1.8	$38.26
2.4	$51.02
3	$63.77
3.6	$76.53
4.8	$102.04

How to read the result

A value above the market price suggests the share may be undervalued under your assumptions, but small changes in r or g₂ move the value a lot. Comparing the two-stage and single-stage values shows how much the faster early growth adds. Use a range of assumptions rather than a single number.

Common mistakes

Using a long-term growth rate equal to or above the required return.
Using D₀ in the Gordon formula without growing it to D₁.
Applying the model to firms that pay little or irregular dividends.
Treating the result as precise.

Keep in mind: Dividend models depend heavily on assumptions and suit stable dividend payers best. This is not investment advice.

Frequently asked questions

What is the Gordon growth model?

A formula valuing a share as D₁ ÷ (r − g) when dividends grow at a constant rate forever.

Why use two stages?

Because many companies grow faster for a period before slowing to a sustainable rate.

What required return should I use?

Your own required return for the stock's risk, often estimated with the capital asset pricing model.

Sources: M. J. Gordon, The Investment, Financing, and Valuation of the Corporation (1962) · J. E. Pinto et al., Equity Asset Valuation, 4th ed. (CFA Institute / Wiley, 2020), Discounted Dividend Valuation

Checked 9 Nov 2026. Gordon growth model (M. J. Gordon, “The Investment, Financing, and Valuation of the Corporation”, 1962) and multistage dividend discount models as in J. E. Pinto et al., “Equity Asset Valuation”, 4th ed. (CFA Institute Investment Series, Wiley, 2020), Discounted Dividend Valuation.

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