Dividend Growth Calculator
Calculate intrinsic stock price using the Gordon Growth Model (Dividend Discount Model), future annual dividend growth per share, cumulative cash income, and Yield on Cost (YoC %).
Calculate Dividend Growth & Gordon Growth Valuation
Enter current annual dividend ($ D0), expected annual growth rate %, required rate of return %, and time horizon years.
Dividend Growth & Valuation Output
Quick Summary
Our dividend growth rate calculator Gordon Growth Model evaluates the intrinsic value of dividend-paying stocks and calculates future dividend income streams. By applying the Gordon Growth Dividend Discount Model ($P_0 = \d1 / r - g$), this calculator determines fair stock prices and projects long-term Yield on Cost (YoC %) compounding.
How It Works: Gordon Growth Model & Dividend Growth
The Gordon Growth Model values a stock based on its future dividend stream growing at a constant rate into infinity.
1. **Next Year Dividend ($d1$):** Calculated as $d1 = D_0 \times (1 + g)$.
2. **Gordon Growth Intrinsic Value ($P_0$):** Calculated as $P_0 = \d1 / r - g$, where $r$ is required return and $g$ is dividend growth rate.
3. **Yield on Cost ($YoC$):** Measures annual dividend income earned relative to original purchase price ($YoC = \D_t / Price_0 \times 100\%$).
Formula Explanation
Your Intrinsic Stock Price ($P_0$) and Future Annual Dividend ($D_t$) are calculated as follows:
Step-by-Step Worked Example
Here is a detailed 5-step breakdown for a stock paying an annual dividend of $4.00 ($D_0$) growing at 7.00% annually ($g$) with a 10.00% required return ($r$) over a 10-year horizon:
- Step 1 (Calculate Year 1 Dividend $d1$): $d1 = \$4.00 \times (1 + 0.07) = \mathbf{\$4.28 / share}$.
- Step 2 (Calculate Gordon Growth Intrinsic Price $P_0$): $P_0 = \\$4.28 / 0.10 - 0.07 = \\$4.28 / 0.03 = \mathbf{\$142.67 \text{ Intrinsic Stock Price}}$.
- Step 3 (Calculate Year 10 Dividend $D_{10}$): $D_{10} = \$4.00 \times 1.07^{10} = \$4.00 \times 1.96715 = \mathbf{\$7.87 / share}$.
- Step 4 (Calculate Cumulative 10-Year Dividends Received): Sum of growing annual dividends over 10 years $= \mathbf{\$59.13 / share}$.
- Step 5 (Calculate 10-Year Yield on Cost): $YoC_{10} = \\$7.87 / \$142.67 \times 100\% = \mathbf{5.52\% \text{ Yield on Cost}}$ (up from initial $2.80\%$ dividend yield at purchase!).
Calculation Examples: Real-World Scenario Comparison
Compare Gordon Growth Valuations and 10-Yr Dividend Growth across stock profiles:
| Current Dividend ($D_0$) | Dividend Growth Rate ($g$) | Required Return ($r$) | Gordon Growth Price ($P_0$) | Year 10 Annual Dividend |
|---|---|---|---|---|
| $2.00 Low Dividend Growth | 5.0% Growth | 9.0% Return | $52.50 / share | $3.26 / share |
| $4.00 Dividend Aristocrat | 7.0% Growth | 10.0% Return | $142.67 / share | $7.87 / share |
| $1.50 High Dividend Growth | 12.0% Fast Growth | 15.0% Return | $56.00 / share | $4.66 / share |
| $5.00 Utility Stock | 4.0% Steady Growth | 8.0% Return | $130.00 / share | $7.40 / share |
Benefits of Using the Dividend Growth Calculator
Utilizing this calculator provides essential value investing advantages:
- Fundamental Stock Valuation: Provides an objective intrinsic price target for dividend-paying stocks based on dividend discount math.
- Highlights Yield on Cost Growth: Demonstrates how purchasing growing dividend stocks turns modest starting yields into double-digit personal yields over time.
- Identifies Undervalued Dividend Stocks: If a stock's current trading price is lower than the calculated Gordon Growth price ($P_0$), it trades at a discount.
- Supports Dividend Growth Investing (DGI): Ideal for long-term income investors building growing passive cash flow for retirement.
Frequently Asked Questions (FAQ)
What is the Gordon Growth Model?
The Gordon Growth Model (a variant of the Dividend Discount Model DDM) calculates the intrinsic value of a stock based on a perpetual series of dividends growing at a constant rate.
What is the Gordon Growth formula?
P0 = D1 ÷ (r - g), where P0 is intrinsic stock price, D1 is next year's dividend, r is required rate of return, and g is constant dividend growth rate.
Why must required return (r) be strictly greater than dividend growth (g)?
If dividend growth (g) equals or exceeds required return (r), the denominator (r - g) becomes zero or negative, resulting in mathematically infinite valuation.
What is Yield on Cost (YoC)?
Yield on Cost measures annual dividend income relative to the original purchase price paid for the stock (YoC = Current Annual Dividend ÷ Original Cost Per Share).
How is Dividend Growth Rate calculated from historical data?
Compound Annual Growth Rate (CAGR) formula: g = (D_recent ÷ D_older)^(1 ÷ years) - 1.
What are the main limitations of the Gordon Growth Model?
It assumes constant perpetual dividend growth, cannot value non-dividend-paying stocks, and is highly sensitive to small changes in r and g.
What is the Two-Stage Dividend Growth Model?
The two-stage model assumes an initial high dividend growth rate for a short period (5-10 years), followed by a lower perpetual growth rate into infinity.
Why do Dividend Growth stocks often beat high-yield stocks long term?
Companies with strong dividend growth typically possess expanding corporate earnings and pricing power, driving capital appreciation alongside growing income.
What is a sustainable dividend growth rate?
Sustainable Growth Rate (SGR) = Return on Equity (ROE) × (1 - Payout Ratio). It measures how fast dividends can grow using internal profits.
Can dividend growth protect against inflation?
Yes! When annual dividend growth (e.g. 7%) exceeds CPI inflation (e.g. 3%), your personal purchasing power increases every year.