Gordon Growth Model Calculator
Value a dividend stock with the Gordon growth (dividend discount) model: next year’s dividend divided by required return minus growth.
How it works
D₁ = D₀ × (1 + g) · Intrinsic value = D₁ ÷ (r − g), where r is the required return and g the dividend growth rate
The Gordon growth model prices a share as the present value of a dividend that grows forever at a constant rate. Because the stream is infinite, the whole thing collapses to next year’s dividend divided by the gap between your required return and the growth rate. The model is exquisitely sensitive to that gap: as growth approaches the required return the denominator shrinks toward zero and the value explodes, which is why it suits stable, mature dividend payers rather than fast growers.
Worked example
A stock just paid a $2.00 dividend expected to grow 4% a year, and you require a 9% return. Next year’s dividend is 2.00 × 1.04 = $2.08. Divided by (0.09 − 0.04) = 0.05, the intrinsic value is $41.60 per share.
Sources: Gordon growth model — Wikipedia
Frequently asked questions
Why must the required return exceed the growth rate?
If growth equals or exceeds the required return, the denominator (r − g) is zero or negative and the formula returns an infinite or nonsensical value. A perpetually growing dividend can only be valued when the discount rate outpaces its growth.
What kind of stocks does the Gordon model suit?
It works best for mature companies with stable, predictable dividend growth — utilities, consumer staples and blue chips. It is unreliable for firms that pay no dividend or whose payouts grow erratically.
What growth rate should I use?
A sustainable long-run rate, usually no higher than the economy’s nominal growth. Plugging in a short-term boom rate overstates value because the model assumes that growth continues forever.
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Educational estimate, not investment advice.