The Gordon Growth Model (GGM) — a specialized form of the Dividend Discount Model (DDM) — focuses on valuing stocks with steady, perpetual dividend growth. While our DDM calculator handles variable growth scenarios, this GGM calculator zeroes in on companies with predictable, long-term dividend increases, giving a cleaner snapshot of intrinsic value when stability is assumed.
Formula
The core formula is:
Where:
- P0 = Intrinsic value (current stock price)
- D1 = Dividend expected next year
- r = Required rate of return
- g = Constant Dividend growth rate
If you only know the current dividend (D₀), the next dividend can be projected as:
Example
If a company paid a $55 dividend this year, expects a 4% annual growth rate, and investors require a 10% return:
So, the fair value per share would be $953.33.
Limitations
- The model assumes constant growth, which may not apply to all companies.
- It’s best suited for mature firms with stable dividend policies.
- It’s highly sensitive to small changes in andg.r
How to use the Gordon Growth Model Calculator
Use this calculator to compare a stock’s market price with its theoretical value and decide if it’s **undervalued or overvalued**.
Choose whether to input current dividend (D₀) or next year’s dividend (D₁).
Enter the growth rate (g) as a percentage.
Enter the required return (r) — your expected annual return rate.
Click Calculate to find the Intrinsic Value (P₀).
Review additional results such as next year’s dividend and dividend yield (r − g).
Frequently Asked Questions
What is the Gordon Growth Model (GGM)?
The Gordon Growth Model, also known as the Dividend Discount Model (DDM), estimates a stock’s intrinsic value based on expected future dividends growing at a constant rate. It’s commonly used for valuing stable, dividend-paying companies.
How is the Gordon Growth Model calculated?
The formula is P₀ = D₁ ÷ (r − g), where P₀ is the current stock value, D₁ is the expected dividend next year, r is the required rate of return, and g is the constant growth rate of dividends.
What’s the difference between D₀ and D₁ in this calculator?
D₀ is the most recent dividend that was just paid. The model projects next year’s dividend as D₁ = D₀ × (1 + g). You can input either depending on whether you want the calculator to estimate next year’s dividend for you.
When should I use the Gordon Growth Model?
Use this model for mature companies with consistent dividend payments and predictable long-term growth. It’s less suitable for startups, cyclical companies, or firms that don’t pay regular dividends.
What are the limitations of the Gordon Growth Model?
The model assumes a constant dividend growth rate forever and a required return greater than the growth rate. If r ≤ g, the formula breaks down, and the valuation becomes unrealistic.
How does the required rate of return affect intrinsic value?
A higher required return (r) decreases the calculated intrinsic value, while a lower r increases it. This reflects investor expectations for risk and return—riskier stocks need higher returns.
What happens if the growth rate is close to the required return?
If the growth rate (g) approaches the required return (r), the denominator (r − g) becomes very small, producing an inflated or unstable valuation. Always check that r is comfortably higher than g.
Can the Gordon Growth Model be used for non-dividend-paying stocks?
No. Since the model relies entirely on dividend payments to estimate value, it’s not applicable to companies that don’t distribute dividends. Alternative valuation models like DCF (Discounted Cash Flow) are better suited in those cases.