This dividend discount model calculator is a fundamental analysis tool operates on the principle that a stock’s worth today equals the sum of all its future dividend payments, discounted back to their present value.
A company like Johnson & Johnson (JNJ) that has consistently paid dividends for over 50 years.
Using DDM Calculator, an investor can input factors such as:
- Current annual dividend: $4.52
- Expected dividend growth rate: 6%
- Required rate of return: 9%
Dividend Discount Model Calculator
| Company Type | Current Dividend | Growth Rate | Required Return | Calculated Value | Market Price | Investment Decision |
|---|---|---|---|---|---|---|
| Conservative | $2.50 | 3% | 8% | $50.00 | $48.00 | Undervalued |
| Growth | $1.75 | 7% | 11% | $43.75 | $45.00 | Overvalued |
| Income | $4.00 | 4% | 9% | $80.00 | $78.50 | Undervalued |
| Value | $3.00 | 5% | 10% | $60.00 | $62.00 | Overvalued |
| Tech Growth | $0.50 | 20% | 15% | $10.00 | $12.00 | Overvalued |
| Utilities | $3.50 | 2% | 6% | $70.00 | $68.00 | Undervalued |
| REIT | $2.25 | 5% | 9% | $45.00 | $44.00 | Undervalued |
| Cyclical Goods | $1.20 | 6% | 12% | $24.00 | $23.50 | Undervalued |
| Pharmaceuticals | $4.50 | 3% | 7% | $90.00 | $88.00 | Undervalued |
| Consumer Goods | $2.80 | 4% | 8% | $56.00 | $55.00 | Undervalued |
| Biotech Growth | $0.75 | 25% | 18% | $9.38 | $10.50 | Overvalued |
Dividend Discount Model Calculation Formula
The DDM equation is expressed as:
P = D / (r - g)Where:
P = Stock’s intrinsic value
D = Next year’s expected dividend
r = Required rate of return
g = Expected dividend growth rate in perpetuity
Important Consideration: This formula is only valid when the growth rate (g) is less than the required rate of return (r).
Let’s examine a practical example:
- Expected dividend next year (D) = $2.50
- Required rate of return (r) = 12%
- Expected growth rate (g) = 5%
P = $2.50 / (0.12 - 0.05)
P = $2.50 / 0.07
P = $35.71How to Calculate Dividend Discount Model?
The process of calculating the DDM is:
- Determine the Expected Future Dividends
- Analyze historical dividend patterns
- Consider company’s dividend policy
- Assess industry trends
- Estimate the Growth Rate
- Evaluate historical growth
- Consider company’s reinvestment rate
- Analyze industry conditions
- Calculate Required Rate of Return
- Consider risk-free rate
- Add market risk premium
- Account for stock-specific risks
- Apply the Formula
- Input all variables
- Solve for present value
A company currently pays $3.00 in annual dividends, with an expected growth rate of 4% and required return of 10%.
Next year's dividend = $3.00 * (1 + 0.04) = $3.12
P = $3.12 / (0.10 - 0.04)
P = $3.12 / 0.06
P = $52.00Dividend Discount Model Examples
Let’s analyze three different scenarios:
Stable Growth Company
- Current dividend: $2.00
- Growth rate: 3%
- Required return: 8%
- Value = $2.06 / (0.08 – 0.03) = $41.20
High Growth Company
- Current dividend: $1.50
- Growth rate: 15% for 5 years, then 3%
- Required return: 12%
Mature Company
- Current dividend: $4.00
- Growth rate: 2%
- Required return: 7%
- Value = $4.08 / (0.07 – 0.02) = $81.60
What is the H model formula for dividend discount
The H-Model is a variation of the DDM that assumes a linear decline in the growth rate from an initial high rate to a stable lower rate.
The formula is:
P = D₀(1 + gL) / (r - gL) + D₀H(gH - gL) / (r - gL)
Where:
D₀ = Current dividend
gL = Long-term growth rate
gH = Initial high growth rate
H = Half-life of high growth period
r = Required rate of return- Current dividend: $3.00
- Initial growth rate: 15%
- Long-term growth rate: 5%
- Half-life period: 5 years
- Required return: 12%
References:
- New York University Stern School of Business – http://pages.stern.nyu.edu/~adamodar/
- CFA Institute – https://www.cfainstitute.org/
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