Dividend Discount Model Calculator

A shareholder who never sells receives only dividends. The dividend discount model therefore values a share as all its future dividends, discounted back to today at the return you require. If the dividend is expected to grow at a steady rate forever, that endless stream has a simple closed form.

The gap (r − g) is the whole story. When it is small, the value is huge and extremely sensitive to the inputs, which is why the calculator warns when r and g are within 3 points of each other and refuses to give an answer when r is not above g.

Many dividends do not grow at one rate forever. The two-stage model lets them grow at a higher rate for a set number of years, then settle to a stable rate. Each dividend in stage 1 is discounted individually, and the stable stream after it is valued with the Gordon formula and discounted back.

You can also turn the model around and ask what return the market price implies. Rearranging the Gordon formula gives the required return that makes value equal price:

That is next year's dividend yield plus growth. For the two-stage model there is no simple formula, so the calculator solves for the rate numerically. If the implied return is below your required return, or below what the 10-year PIB pays (12.85% at the State Bank's October 7, 2026 auction), the price is not paying you enough for the risk, on those dividend assumptions.

A company paid Rs 15.00 per share last year. You expect dividends to grow 6% a year forever and require a return of 20%. Next year's dividend is Rs 15.90 and the Gordon value is Rs 15.90 ÷ (20% − 6%) = Rs 113.57. If the share trades at Rs 100.00, the price implies a return of 21.9% (15.9% dividend yield plus 6% growth), above the 20% you require.

The two-stage value is higher than the Gordon value because the first 5 years grow at 12%, faster than the 6% the Gordon case assumes, and its implied return at Rs 100.00 is 25%. 55% of the two-stage value comes from dividends after year 5, a reminder of how much rests on the long-run assumptions.

The DDM suits companies with long, steady dividend records and predictable payouts. On the PSX that often means fertiliser makers such as FFC, exploration and production companies such as OGDC, power producers such as HUBC and established banks, where a large part of profit is regularly paid out.

It fails for companies that pay no dividend, pay irregularly, or keep most of their profit to grow. There is no dividend to discount, so the value comes out at zero or absurdly low, which says nothing about the business. For those use the intrinsic value (DCF) calculator. To see what a stock pays against its price today, use the dividend yield calculator, and for what a holding pays you in rupees a year, the dividend calculator.

• Dividend policy can change. Companies cut or skip dividends when earnings fall or cash is tied up. Check the payout ratio and dividend cover shown with your result: a payout above 100% is drawing on reserves.
• Cash trapped in receivables. Some power and energy companies report profit but wait for payment from the government chain, which can squeeze dividends. Profit alone does not guarantee a payout.
• One-off and special dividends. If D0 includes a special payout, it overstates the steady dividend. Use a normal annual figure.
• Extreme sensitivity. A one-point change in r or g can move the value by 10% or more when the gap between them is small.
• Tax and growth. The model is before dividend tax, and it values only dividends, not the growth a company could create by reinvesting. Use your after-tax dividend as D0 for your own value, see the dividend tax calculator.