What is the Dividend Discount Model (DDM)?

The Dividend Discount Model (DDM) is a valuation method that calculates the intrinsic value of a stock based on the present value of its expected future dividends. It assumes that dividends grow at a constant rate indefinitely.

What is the DDM formula?

The DDM formula is: Fair Value = D₁ / (r - g), where D₁ is next year's expected dividend (D₀ × (1 + g)), r is the required rate of return, and g is the expected dividend growth rate.

What is the Gordon Growth Model?

The Gordon Growth Model (GGM) is another name for the Dividend Discount Model. Named after economist Myron Gordon, it values a stock by assuming dividends grow at a constant rate forever and discounting them to present value.

When should I use the Dividend Discount Model?

The DDM works best for mature, stable companies with a consistent history of paying and growing dividends. It's ideal for valuing utility companies, REITs, and blue-chip stocks with predictable dividend policies.

What are the limitations of the Dividend Discount Model?

The DDM has limitations: it doesn't work for non-dividend paying stocks, assumes constant growth forever, is sensitive to input assumptions, and requires the growth rate to be less than the required return rate.

What is a good required rate of return for DDM?

The required rate of return varies by investor and risk tolerance. A common approach is using the Capital Asset Pricing Model (CAPM) or adding a risk premium to the risk-free rate. Typical values range from 8-12% for stocks.

Why must growth rate be less than required return?

If the growth rate equals or exceeds the required return, the DDM formula produces infinite or negative values, which are meaningless. This mathematical constraint reflects the reality that sustainable dividend growth cannot exceed the overall market return indefinitely.

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Dividend Discount Model Calculator

Calculate the intrinsic value of a dividend-paying stock based on future dividend expectations

Formular: Fair Value = D₁ / (r - g)

Where D₁ = D₀ × (1 + g)

Best for: Mature companies with stable, predictable dividend growth. The model assumes dividends grow at a constant rate forever.

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