Dividend Discount Model (DDM) values a stock as the present value of future dividends. Pick the variant that matches how dividends grow: zero, constant, or changing.
Formulas
Notation:
General present-value setup (multi-stage):
Zero-growth (no growth, level dividend forever): P0 = D / r
Constant-growth (Gordon Growth):
Two-stage (g1 for N years, then g2 forever):
H-Model (growth declines linearly from gS to gL over 2H years): P0 = [ D0 (1 + gL) + D0 H * (gS - gL) ] / (r - gL)
How to Use the Dividend Discount Calculator
Follow these steps to select a DDM model, enter dividends and rates, and get the intrinsic value per share.
Choose the model
Select Zero Growth, Constant Growth (Gordon), or Two-Stage Growth at the top. Use Zero Growth for flat dividends, Gordon for steady long-term growth, and Two-Stage for a finite high-growth period before settling to a long-run rate. Picking the wrong model leads to unrealistic valuations.
Pick the dividend input type
Under Dividend Input, choose Last Dividend (D0) if you have the most recent paid dividend, or Next Dividend (D1) if you know the upcoming dividend. The calculator will convert between D0 and D1 using the growth rate when needed. Mixing D0 with a D1 setting will misstate the value.
Enter the dividend amount
Type the dividend per share (e.g., 2 or 2.00) in your currency. This is the annual dividend for most stocks; if you have quarterly amounts, add them up first. Use a period for decimals (e.g., 1.25, not 1,25). Don’t enter total dividends for all shares—use per share.
Enter the required return (r)
Input your expected annual return as a percent (e.g., 9 for 9%). This should reflect your cost of equity or desired return. A common mistake is entering 0.09; enter 9 instead.
Enter the growth rate(s) (g)
For Gordon, enter a single long-term growth rate in percent (e.g., 4). For Two-Stage, enter the first-stage growth rate, the number of years (N), and the long-run/terminal growth rate gₗ. Ensure r exceeds the terminal growth rate; if r ≤ gₗ the formula breaks.
Review results and adjust display
Toggle “Show Decimals” if you need more precision and review the Intrinsic Value plus any stage and terminal value components. If numbers look extreme, revisit your inputs—especially r, g, and the D0/D1 selection.
Frequently Asked Questions
What formula does the Constant-Growth (Gordon) model use?
Intrinsic value is computed as P0 = D1 / (r − g). If you provide last dividend D0, the tool first computes next dividend D1 = D0 × (1 + g). The condition r > g must hold for the model to be valid. These relations follow from the Gordon–Shapiro dividend growth framework.
What’s the difference between entering D0 (last dividend) and D1 (next dividend)?
If you enter D0, the calculator grows it by the long-term rate g to get D1 (D1 = D0 × (1 + g)). If you enter D1 directly, that growth step is skipped and P0 = D1 / (r − g) is applied.
How does the Zero-Growth model work?
It assumes a level perpetuity of dividends, so price is P0 = D / r, where D is the constant dividend per period and r is the required return. This is the perpetuity special case of the Gordon–Shapiro setup when g = 0.
How is the Two-Stage Dividend Discount Model calculated?
The calculator sums the present value of each explicitly forecast dividend during the high-growth stage and adds a terminal value at the switch date computed with the constant-growth formula: TV = D_{n+1} / (r − g_stable). Total value = PV(stage dividends) + PV(TV). This is the standard “finite explicit + perpetual continuation” construction used in dividend valuation.
How are rates, currency, and rounding handled?
r and g are annual rates entered in percent (internally treated as decimals). Currency display follows ISO 4217 conventions for codes/decimal places; monetary outputs round to the selected display precision using round-half-to-even (banker’s rounding) per NIST SP 811.
The tool implements three DDM variants. Zero-growth uses P0 = D / r. Constant-growth (Gordon) uses P0 = D1 / (r − g) with D1 = D0 × (1 + g) when D0 is provided; inputs are annual and expressed as decimals internally, and the model is computed only when r > g, otherwise the calculation is flagged as out-of-domain. The two-stage model discounts each dividend in the first stage and adds a terminal value at the stage boundary using the constant-growth formula, then discounts that terminal value to present.
Currency handling follows ISO 4217 decimal conventions (e.g., 2 minor units for USD), and all displayed monetary figures are rounded using round-half-even to the chosen precision, aligned with NIST guidance; numeric inputs are not re-rounded internally beyond IEEE-754 defaults, but final outputs use banker’s rounding to avoid bias.
Sources & Methodology
- Dividends, Earnings, and Stock Prices
- Capital Equipment Analysis: The Required Rate of Profit
- Guide for the Use of the International System of Units (SI) — NIST Special Publication 811 (2008 Edition)
- Dividends, Earnings, and Stock Prices
- Capital Equipment Analysis: The Required Rate of Profit
- Guide for the Use of the International System of Units (SI) — NIST Special Publication 811 (2008 Edition)