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Nvidia
Estimated Fair Value$5.58
Current Stock Price$229.28
Dividend per Share$0.52
Dividend Growth5.5%
Cost of Equity15.3%
Gordon Growth Dividend Discount Model (DDM)
For informational and educational purposes only • Not investment advice.
Compare Dividend Discount values across companies
Apple
Estimated Fair Value$22.43
Current Stock Price$336.64
Dividend per Share$1.06
Dividend Growth5.5%
Cost of Equity10.5%
Alphabet
Estimated Fair Value$16.82
Current Stock Price$351.66
Dividend per Share$0.86
Dividend Growth5.5%
Cost of Equity10.9%
Microsoft
Estimated Fair Value$80.13
Current Stock Price$535.07
Dividend per Share$3.64
Dividend Growth5.5%
Cost of Equity10.3%
Dividend Growth
Equity Risk Premium
%
Range: 2–10%
What is the Dividend Discount Model?
The Dividend Discount Model (DDM) is based on the idea that dividends represent cash returned directly to shareholders and therefore contribute to the value of a stock.
The model estimates a company's intrinsic value from the dividends shareholders are expected to receive, their expected long-term growth and the return required by shareholders.
The Gordon Growth version of the DDM assumes that dividends grow at a constant long-term rate. It is therefore most suitable for companies with stable and sustainable dividend payments.
Dividend Discount Model Formulas
Dividend Discount Model
Next Dividend
Gordon Growth Model
How the Dividend Discount Model Works
The Dividend Discount Model estimates intrinsic value by starting with the current dividend, growing it into next year's expected dividend, discounting future dividends using shareholders' required return, and comparing the resulting value with the current market price.
Determine
Current Dividend
→
Estimate
Dividend Growth
→
Forecast
Next Dividend
→
Estimate
Cost of Equity
→
Apply Gordon
Growth Model
→
Compare With
Market Price
Key Model Assumptions
• The company pays regular and sustainable cash dividends.
• Dividends are assumed to grow at a constant long-term rate.
• Sustainable Dividend Growth is estimated from Return on Equity and the Retention Ratio. EPS uses trailing twelve-month (TTM) data when available, with the latest annual value used as a fallback.
• The selected Dividend Growth scenario adjusts the Sustainable Growth Rate.
• The Cost of Equity represents the return required by shareholders and is estimated using CAPM.
• The Risk-Free Rate is based on the U.S. 10-Year Treasury yield published by the Federal Reserve Board.
• Dividend Growth must remain below the Cost of Equity for the Gordon Growth Model to produce a valid valuation.
• Dividends are assumed to grow at a constant long-term rate.
• Sustainable Dividend Growth is estimated from Return on Equity and the Retention Ratio. EPS uses trailing twelve-month (TTM) data when available, with the latest annual value used as a fallback.
• The selected Dividend Growth scenario adjusts the Sustainable Growth Rate.
• The Cost of Equity represents the return required by shareholders and is estimated using CAPM.
• The Risk-Free Rate is based on the U.S. 10-Year Treasury yield published by the Federal Reserve Board.
• Dividend Growth must remain below the Cost of Equity for the Gordon Growth Model to produce a valid valuation.
Step 1 — Determine the Current Dividend
Current Dividend = Annual Dividend per Share
The model begins with the company's current annual Dividend per Share, representing the cash currently distributed to shareholders.
This dividend forms the starting point for estimating future dividends. If the latest dividend is unavailable, the most recent historical dividend may be used instead.
Step 2 — Estimate Sustainable Dividend Growth
Return on Equity = EPS / Book Value per Share
Retention Ratio = 1 − Dividend Payout Ratio
Sustainable Growth = Return on Equity × Retention Ratio
Selected Dividend Growth = Sustainable Base Growth + Scenario Adjustment
Sustainable Dividend Growth is estimated from the company's Return on Equity and Retention Ratio. The Retention Ratio represents the portion of earnings retained rather than distributed as dividends.
Return on Equity and the Dividend Payout Ratio use trailing twelve-month (TTM) EPS when available, with the latest annual EPS used as a fallback. Book Value per Share is based on the latest available balance sheet value.
The resulting Sustainable Growth Rate forms the Base assumption. The selected Dividend Growth scenario then adjusts this rate to determine the growth assumption used in the valuation.
Step 3 — Estimate Next Year's Dividend
Next Dividend = Current Dividend × (1 + Dividend Growth)
The Gordon Growth Model values the dividend expected over the next year, rather than only the dividend currently paid.
The current Dividend per Share is therefore increased by the selected Dividend Growth Rate to estimate the Next Dividend.
Step 4 — Calculate the Cost of Equity
Cost of Equity = Risk-Free Rate + Beta × Equity Risk Premium
The Cost of Equity represents the return shareholders require for investing in the company and is estimated using the Capital Asset Pricing Model (CAPM).
Step 5 — Apply the Gordon Growth Formula
Fair Value per Share = Next Dividend / (Cost of Equity − Dividend Growth)
The Gordon Growth Model assumes that dividends continue growing at the selected Dividend Growth Rate indefinitely.
Fair Value per Share is calculated from the Next Dividend, the Cost of Equity and the Dividend Growth Rate. A higher expected dividend or growth rate increases the valuation, while a higher Cost of Equity reduces it.