The Gordon growth model estimates share value from constant dividend growth, with examples of dividend timing, required return, and price-implied growth.
The Gordon growth model (GGM) estimates a share’s value today as the present value of dividends expected to grow at a constant rate indefinitely. Also called the Gordon-Shapiro model, it is the constant-growth form of the dividend discount model.
The result is a value estimate conditional on the dividend forecast and required return, not the observed market price or a promise of future returns. It is most useful when a company’s dividend policy and long-run distribution capacity can reasonably be modeled with stable growth.
Assume annual dividends paid at year-end, a constant annual required return, and a constant annual growth rate:
The inputs are:
The cost of equity should match the dividend stream’s risk and currency. Keep nominal or inflation-adjusted assumptions consistent. Quarterly payments require a compatible schedule and rate; do not insert one quarterly payment into a formula using annual rates.
CFA Institute’s discounted dividend valuation overview sets out the constant-growth formula and distinguishes dividend, free-cash-flow, and residual-income models.
The formula sums an infinite stream of discounted dividends. Each successive discounted payment changes by the factor (1 + g) / (1 + r). With positive dividends and growth above -100%, that factor must be below one for the sum to converge.
If r equals g, the sum has no finite value. If g exceeds r, inserting the rates into the fraction produces a negative number, but that is not a valid negative stock valuation. The infinite positive cash-flow stream does not converge under those assumptions.
A hypothetical company has these annual, nominal U.S.-dollar inputs. Dividends arrive at year-end, and investor-specific taxes and fees are excluded.
| Input | Assumption |
|---|---|
| Dividend just paid, D0 | $2.00 |
| Perpetual dividend growth, g | 4% |
| Required equity return, r | 9% |
The next dividend is $2.00 times 1.04, or $2.08:
Using the just-paid $2.00 would give $40.00. That understates this model’s result by $1.60 because it uses the wrong dividend date.
The estimate also changes when the required return changes, even if the dividend forecast does not:
| Required return | Next dividend at 4% growth | Estimated value |
|---|---|---|
| 8% | $2.08 | $52.00 |
| 9% | $2.08 | $41.60 |
| 10% | $2.08 | About $34.67 |
These are sensitivity calculations, not equally likely outcomes or a recommended price range. The assumptions may fail, and a market price below the estimate does not guarantee an investment gain.
The model values the cash received on one share. Whether the investor spends those dividends, saves them, or buys more shares does not change that share’s assumed dividend stream.
In the example, the model value immediately after the next year’s dividend is paid would be $41.60 times 1.04, or $43.264, if growth and the required return remain unchanged. The shareholder could receive $2.08 in cash without reinvesting it:
This is a consistency check within the model, not a prediction of next year’s trading price. Reinvesting dividends would change the investor’s share count and portfolio cash flows; it is not necessary for this present-value calculation.
An analyst can set model value equal to an observed price and solve for the growth assumption that reconciles them. Which dividend is treated as known matters.
If next year’s dividend D1 is supplied independently:
If the known input is the dividend just paid, D0, and next year’s dividend must equal D0 times (1 + g), the consistent rearrangement is:
For a hypothetical price of $52.00, a just-paid $2.00 dividend, and a 9% required return:
Using the earlier $2.08 next-year forecast as a fixed input instead would imply 5%. That answers a different question: it does not impose constant growth starting from the just-paid $2.00. State whether D0 or D1 is held fixed rather than mixing the two approaches.
Implied growth is not a forecast extracted independently from the market: it also depends on the assumed required return and the model. Damodaran’s NYU dividend discount model notes illustrate solving for the growth rate consistent with a share price.
| Situation | More appropriate modeling approach |
|---|---|
| Dividends can reasonably grow at one stable rate | A constant-growth GGM may be a useful valuation cross-check |
| Rapid growth is expected before maturity | Forecast near-term dividends separately, then use a stable-growth terminal phase |
| No dividends now, but distributions are expected later | Model their start date explicitly; a zero current dividend does not prove the shares have no value |
| Dividends poorly represent cash available to shareholders | Consider an equity free-cash-flow or residual-income model |
| The analysis values operations for all capital providers | Use firm cash flow and a compatible cost of capital, not common dividends and WACC |
For a multistage model ending its detailed forecast at year n, Gordon growth can estimate terminal equity value at year n from dividend n+1. That amount must still be discounted to today. The terminal value is not an additional dividend or a guaranteed sale price.
This article provides general financial education, not personalized investment or valuation advice. Common dividends can be reduced or suspended, and no valuation model guarantees a return.