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Dividend Discount Model (DDM) Calculator

Enter a stock’s dividend, how fast you expect it to grow and the return you want. The calculator works out what one share is worth from its dividends, shows how sensitive that is to your guesses, and tells you what today’s price assumes.

Value per share

$52.00

From its dividends, at your 8% required return

Next year’s dividend: $2.08; 4% more than $2.00
Today’s price: $45.00; value is 16% higher
Your return at today’s price: 8.6%; a year, if the growth holds
Growth the price implies: 3.4%; long-term, at your 8%

If the $2.00 dividend grows 4% a year forever and you want a 8% yearly return, the model values one share at $52.00. That’s 16% more than today’s price of $45.00: buying at that price, these dividends would return about 8.6% a year. Change long-term growth by one point either way and the value runs from $41.20 to $70.00, so treat it as a rough guide.

How much the value depends on your guesses

Value per share if your required return or the long-term growth rate is a little different. Your own numbers are highlighted.

Value per share by required return (rows) and long-term dividend growth (columns)
Return	3%	4%	5%
	Long-term growth
6%	$68.67	$104.00	$210.00
7%	$51.50	$69.33	$105.00
8%	$41.20	$52.00 (your inputs)	$70.00
9%	$34.33	$41.60	$52.50
10%	$29.43	$34.67	$42.00

Value at different long-term growth rates

Value per share at your 8% required return. As growth gets close to the return, the value shoots up.

Where the value comes from

Dividends in the next 10 years: $16.35(31%)
Dividends after year 10: $35.65(69%)

Most of the value usually comes from dividends many years away, which are the hardest to predict.

Dividends year by year

Each dividend and what it’s worth today. Dividends after year 50 make up the rest of the $52.00.

What this calculator assumes

The dividend grows at one steady rate forever, or (with two stages) at one rate for a set number of years and then at a lower rate forever. The switch between the two stages happens all at once.
Dividends are paid once a year, at the end of each year, starting a year from now. Many companies pay smaller amounts every quarter instead, which makes a small difference.
The same required return applies to every year. Some analysts use a different rate for the fast-growth years.
The value comes only from dividends. Share buybacks and cash the company keeps aren’t counted, so it can undervalue companies that pay out less than they could.
Growth and returns are yearly rates before inflation, taxes and trading costs.
It’s an estimate built on your guesses about the future, not a price forecast or a recommendation to buy or sell.

These are estimates to help you understand the numbers, not financial advice. Check the exact figures with your lender or a qualified adviser before making a decision.

What the dividend discount model does

When you own a share, the cash the company sends you is its dividends. The dividend discount model (DDM) asks a simple question: if all you ever got from this share were its dividends, what would it be worth to you today?

A dollar you’ll receive in ten years is worth less than a dollar now, because a dollar now could be invested and earning a return in the meantime. So the model shrinks, or discounts, each future dividend by the yearly return you want, and adds them all up. That total is the share’s value to you.

The formula

Adding up dividends forever sounds impossible, but if the dividend grows at the same rate every year, the sum collapses into a short formula called the Gordon growth model:

Value per share = next year’s dividend ÷ (required return − growth rate)

Next year’s dividend is the last year’s dividend grown by one year: $2.00 growing 4% becomes $2.08.
Required return is the yearly return you’d want for the risk of owning the stock. It’s your choice, and a riskier company calls for a higher one.
Growth rate is how fast you expect the dividend to rise each year, for good.

Some companies are expected to grow quickly for a while and then slow down. The two-stage version handles that. It values the dividends in the fast years one by one, then uses the formula above for everything after them. That second part is called the terminal value, and it’s discounted back to today like any other future payment.

Worked example

Say a company paid $2.00 a share in dividends over the last year. You expect the dividend to grow 4% a year for the long run, and you want a 8% yearly return for the risk of owning it.

Next year’s dividend: $2.00 × 1.04 = $2.08.
Required return minus growth: 8% − 4% = 4%.
Value per share: $2.08 ÷ 0.04 = $52.00.

If the share trades at $45.00, the model says it’s worth about 16% more than the price. Put the other way round: buy at $45.00 and, if the dividend really does grow 4% a year, you’d earn about 8.6% a year ($2.08 ÷ $45.00 is a 4.6% dividend yield, plus 4% growth).

Now nudge the growth guess. At 3% growth the same share is worth $41.20; at 5% it’s worth $70.00. One percentage point either way swings the value by $28.80, which is why the sensitivity table is worth a look.

With two stages instead, say the dividend grows 10% a year for 5 years before slowing to 4%. The share is then worth $67.57: $10.57 from the dividends in the fast years and $57.00 from everything after them.

Why small changes matter so much

Look at the bottom of the formula: required return minus growth. That gap is usually only a few percentage points, and dividing by a small number magnifies everything. Shrink the gap from 4 points to 2 and the value doubles. As growth creeps up towards the required return, the value heads towards infinity.

That’s why the calculator shows a table and a chart of values. If a small, reasonable change to your guesses moves the answer a long way, the most you can honestly say is that the share is worth somewhere in that range.

When the model doesn’t work

The company pays no dividend. With nothing to discount, there’s no answer. Growth stocks rarely pay dividends, so the DDM can’t value most young, fast-growing companies.
Growth is at or above your required return. The formula then gives an infinite or negative value. No company can grow faster than the whole economy forever, so a long-term rate that high is a sign the assumption is wrong. For a company growing fast right now, use two stages and keep the long-term rate modest.
The company returns cash in other ways. Many companies buy back their own shares, or pay out much less than they could afford. The model only counts dividends, so it can undervalue these companies.
The dividend is erratic. The model assumes smooth growth. A company whose dividend jumps around, or might be cut, doesn’t fit neatly, and there’s no guarantee any company will keep doing well.

How to use it well

Start with steady dividend payers. The model fits mature companies with a long record of regular dividends, such as established utilities, far better than young companies.
Keep long-term growth modest. Look at how fast the dividend has grown over many years, not just the last one, and remember it has to last forever.
Ask what the price assumes. Enter today’s price and look at the growth rate it implies. If the market price only makes sense with growth you find hard to believe, that’s useful to know. If it implies growth that looks easy, the shares may be good value, or the market may know something you don’t.
Use it as one clue among several. The value is only as good as your guesses. Use it alongside what you know about the business, and never as the only reason to buy or sell.

Frequently asked questions

What is the dividend discount model?

It’s a way to estimate what a share is worth from the dividends it will pay you. Each future dividend is converted into today’s money using the return you want, and the results are added up. The simplest version, the Gordon growth model, assumes the dividend grows at a steady rate forever, which makes the sum a short formula: next year’s dividend divided by (required return minus growth).

What required return should I use?

It’s the yearly return you’d want for the risk of owning this particular stock, so it’s your choice. Textbooks often build it from the return on a safe investment such as US Treasury bonds, plus extra for the stock’s risk. The worked examples in the sources below use between 6% and 15%. A riskier company deserves a higher number, and a higher number gives a lower value.

Why must growth be lower than the required return?

The formula divides by the required return minus growth. As growth gets close to the return, that gap shrinks towards zero and the value shoots towards infinity; if growth is higher, the formula gives a negative value. Neither makes sense. In reality no company can grow its dividend faster than the whole economy forever, so a long-term rate at or above your required return means the steady-growth assumption doesn’t fit. For a fast grower, use two stages.

Can I use this for a company that doesn’t pay dividends?

No. With no dividend there’s nothing to discount, and the model can’t produce a value. Many younger, fast-growing companies pay no dividends and reinvest their profits instead. They need other methods, such as valuing the cash the business generates.

What’s the difference between one rate and two stages?

One rate (the Gordon growth model) suits mature companies whose dividends grow at a modest, steady pace, like many utilities. Two stages suit a company expected to grow faster for a few years before slowing down: you set the fast growth rate, how many years it lasts, and the steady rate after that.

What is a terminal value?

In the two-stage model, it’s the value at the end of the fast-growth years of every dividend still to come. It’s worked out with the steady-growth formula and then discounted back to today. It often makes up most of the share’s value, which is why the long-term growth rate matters so much.

If the value is above the price, should I buy?

Not on this alone. The answer depends entirely on guesses about growth and return that nobody knows for sure, and small changes to them move it a lot. A more useful question is what the price assumes: the calculator shows the return you’d earn at today’s price and the growth rate the price implies. If those look unrealistic, that tells you something.