How to use the dividend discount model calculator
- Choose whether the dividend you know is the last one paid or next year's.
- Enter the yearly dividend per share, your required return and the growth rate you assume for the dividend.
- Open More options to enter the current share price and compare it with the model value.
- Read the value per share, next year's dividend and the yield at that value.
Formula
Next year's dividend D1 = last dividend x (1 + growth)
Value = D1 / (required return - growth)
The required return must be above the growth rate
The formula is the sum of an endless stream of dividends that grow at a constant rate, each discounted at your required return. It only works when growth is below the required return, and the page refuses other inputs.
A $2.00 dividend growing at 3% with an 8% required return
Next year's dividend is 2.00 x 1.03 = $2.06. The value is 2.06 / (0.08 - 0.03) = $41.20 a share, which is a 5.00% dividend yield at that price. Adding 20,000 years of discounted dividends one by one gives the same $41.20, which confirms the formula.
With a next-year dividend of $2.00, a 10% required return and 2% growth, the value is exactly 2 / 0.08 = $25.00. If the share trades at $35, the model value of $41.20 is 17.7% above the price and the dividend yield at $35 is 5.89%.
Why small changes matter
The value depends on the gap between the required return and growth. With an 8% required return, raising growth from 3% to 4% changes the gap from 5 to 4 points and raises the value by about a quarter. This sensitivity is why the model is a way to think about assumptions and not a precise price target. Always try several growth rates.
Where the model fits
The model suits companies that pay steady dividends that grow at a roughly constant rate. It does not suit companies that pay no dividend, pay irregularly or are growing much faster than the economy, because growth cannot stay above the required return forever. It is a learning tool and not investment advice.
For dividend income over time use the Dividend Calculator, to look at earnings use the P/E Ratio Calculator and for a fixed stream with no growth use the Perpetuity Value Calculator.
Assumptions and limits
- Dividends grow at one constant rate forever and are paid once a year.
- The required return is a yearly rate that you choose, and growth is below it.
- The share price, if entered, is for the same share class.
- Nothing is uploaded. Calculations run in your browser.
Frequently asked questions
What required return should I use?
Use the return you need for the risk of this stock, such as what you could earn on similar investments. It is your own choice. Try a range, because the value changes a lot with it.
Why must growth be below the required return?
If growth were higher, the dividends would grow faster than the discount rate and the sum would never stop growing, so the formula gives no value. The page asks you to lower growth or raise the required return.
Can growth be negative?
Yes. A shrinking dividend lowers the value. For example a next-year dividend of $2.00, a negative 2% growth and an 8% required return gives $20.00.
Can I use this for a company without dividends?
Not directly. The model needs a dividend. For other companies, look at earnings, cash flow or sales, and remember that this page is for learning and not for investment advice.