How to use the two stage dividend discount calculator
- Enter the latest annual dividend per share.
- Enter the growth rate in the fast stage, the years in the fast stage, and the steady growth rate that follows.
- Enter your required return. It must be higher than the steady growth rate.
- Optionally enter the current share price to compare the value with the price.
Formula
dividend in year t = D0 x (1 + g1)^t for t = 1 to N
value of the fast stage = sum of dividend t / (1 + r)^t
terminal value at year N = D(N) x (1 + g2) / (r - g2)
value per share = fast stage value + terminal value / (1 + r)^N
D0 is the latest dividend, g1 and g2 are the fast and steady growth rates, N is the length of the fast stage and r is the required return. The steady stage is the Gordon growth model, applied from the end of the fast stage.
Five years of fast growth, then steady growth
The latest dividend is $2.00. It grows 10 percent a year for 5 years and 3 percent after that, and you require 9 percent. The dividends are $2.20, $2.42, $2.66, $2.93 and $3.22, worth $10.28 together today. The year 6 dividend is $3.32 and the terminal value at year 5 is $3.32 / (0.09 - 0.03) = $55.29, worth $35.94 today.
The value is $10.28 + $35.94 = $46.22 per share. If the share price is $60.00, the model value is $13.78, or 22.97 percent, below the price. Over three quarters of the value, 77.76 percent, comes from the steady stage.
Reading the result with care
A dividend model puts a value on what you can expect to be paid. It is very sensitive to the steady growth rate and the required return: when they are close, the terminal value becomes very large. Try a few combinations and look at the share of value that comes from the steady stage. If it is most of the value, the answer depends mainly on a guess about the distant future.
The model also assumes the company keeps paying dividends and growing them on schedule. It does not suit companies that pay no dividend.
Related valuation tools
For a single steady growth rate, use the Dividend Discount Model Calculator. To pick a required return, see the Cost of Equity Calculator. To value the business itself from its cash flows, use the DCF Calculator. This page is a way to test assumptions and is not a recommendation to buy or sell anything.
Assumptions and limits
- The dividend grows at exactly the fast rate through the first stage and the steady rate forever after.
- Dividends are paid once a year at the end of each year.
- The required return is constant and above the steady growth rate.
- Taxes, buybacks and changes in the number of shares are not included.
- The dividend, growth rates and required return shown when the page opens are examples.
Frequently asked questions
Why must the required return exceed the steady growth rate?
The steady stage is worth the next dividend divided by the gap between the two rates. If the gap is zero or negative, the value is not a finite number, so the page asks you to widen it.
Can the fast stage growth be negative?
Yes, down to minus 50 percent. A shrinking dividend can model a company in decline before it stabilizes.
How is this different from the single stage model?
The single stage model uses one growth rate forever. Here a fast stage runs first and the steady rate starts after it, which suits a company whose growth is expected to slow.
What if the company pays no dividend today?
The model needs a dividend to grow from. For a company that will start paying later, value the cash flows with a discounted cash flow model instead.