If you're trying to figure out whether a dividend stock is worth buying at its current price, the Gordon Growth Model is one of the fastest ways to get an answer. Plug in three numbers—the dividend, your required return, and how fast you think dividends will grow—and you'll have an estimate of what the stock is actually worth.

That number by itself doesn't tell you much, though. What matters is comparing it to what the stock trades for today. A company valued at $75 that's selling for $50? That's worth a closer look. One valued at $60 but priced at $100? You're probably better off waiting—or looking elsewhere.

This calculator handles the math instantly. The rest of this page helps you understand what that number really means.

Back in 1959, economist Myron Gordon formalized an idea that sounds almost too simple: a stock is worth whatever cash it will pay you over time, adjusted for the fact that money today beats money tomorrow.

That's it. The Gordon Growth Model (sometimes called the Dividend Discount Model) takes all those future dividend payments, discounts them back to today's dollars, and adds them up. The result is your estimate of intrinsic value.

Now, "all future dividends" sounds impossible to calculate—and it would be, except Gordon made one simplifying assumption: dividends grow at a constant rate forever. Obviously no company does this perfectly. But mature, stable businesses often come close enough that the model works remarkably well.

Utility companies, consumer staples giants, the so-called "dividend aristocrats" that have raised payouts for 25+ consecutive years—these are the stocks where assuming steady 3-5% growth isn't fantasy. It's roughly what they've delivered for decades.

Here's the entire Gordon Growth Model:

Stock Value = D ÷ (r - g)

Three variables:

• D = Next year's expected dividend
• r = Your required rate of return (the discount rate)
• g = Expected annual dividend growth rate

That's really all there is to it. The elegance is in the simplicity.

D (Expected Dividend): Don't use the current dividend—use what you expect next year. If a company pays $4.00 now and typically bumps it 5% annually, your input is $4.20.

r (Required Return): What's the minimum return you'd need to justify owning this stock? This reflects the risk you're taking. Safe blue-chip? Maybe 8%. Smaller, less predictable company? Probably 11-12%.

g (Growth Rate): How fast will dividends grow each year? Look at history, but be conservative. Companies disappoint more often than they exceed expectations.

Say a stock pays $5.00 annually, you want a 10% return, and you expect 3% dividend growth:

Value = $5.00 ÷ (0.10 - 0.03) = $5.00 ÷ 0.07 = $71.43

If that stock trades below $71.43, your required return would be exceeded—potentially a good deal. Above that price, you're accepting less than you wanted.

Step 1: Enter the Dividend Put in the annual dividend you expect over the next 12 months. If the company currently pays $4.00 and you expect a 4% raise, use $4.16.

Step 2: Set Your Discount Rate This is your required return—what you need to earn to make this investment worthwhile. Somewhere between 8-12% works for most established dividend stocks. Pick a number you'd genuinely accept.

Step 3: Add the Growth Rate What's your best estimate for annual dividend growth? Check the company's track record, but round down a bit. Optimism here leads to inflated valuations.

Step 4: Compare to Market Price Take your result and stack it against the current stock price. Significantly higher? The stock might be undervalued. Lower? It's probably overpriced—at least based on your assumptions.

Choosing the right inputs is the hard part. The formula is easy; knowing what numbers to feed it isn't. Here's what actually works.

Your discount rate should reflect two things: what you could earn elsewhere with similar risk, and your personal required return for this specific stock.

The simple approach: Start at 10%. That's roughly what the stock market has returned historically. Bump it up a point or two for riskier stocks, knock it down for rock-solid ones.

The slightly fancier approach: Take the current 10-year Treasury yield (your "risk-free" baseline—lately around 4-5%), then add a risk premium. For a stable dividend stock, 4-5% extra is typical. For something more volatile, add 6-7%.

If you know the stock's beta: You can use CAPM. Required Return = Risk-Free Rate + Beta × Market Risk Premium. A stock with a beta of 0.8 and 4.5% risk-free rate works out to about 8.9%. But honestly, for most individual investors, the simple approach gets you close enough.

Start with history. Pull up the company's dividend record for the past 10 years. If dividends went from $2.00 to $3.00 over that period, that's roughly 4.1% annual growth. That's your baseline.

Then reality-check it. Is the company's business as strong as it was? Is the payout ratio (dividends as a percentage of earnings) getting stretched? A company paying out 90% of earnings doesn't have much room to raise dividends unless earnings grow.

Finally, round down. Whatever number you come up with, shave off half a percent. Being a little conservative won't cost you good opportunities, but being optimistic will lead you into overpriced stocks.

One critical rule: Your growth rate has to be lower than your discount rate. If g ≥ r, the math breaks and the output is nonsense. If you find yourself plugging in a 7% growth rate against an 8% discount rate, something's wrong with your assumptions.

You're looking at a consumer staples company—one of those boring-but-reliable names that's raised dividends for 50 straight years.

• Current dividend: $4.50 per share
• Historical growth: About 6% annually
• Your required return: 9%

Next year's expected dividend: $4.50 × 1.06 = $4.77

Value = $4.77 ÷ (0.09 - 0.06) = $4.77 ÷ 0.03 = $159.00

If this stock trades around $140, that 12% discount to your calculated value suggests it might be undervalued. At $180, you'd be paying a 13% premium—harder to justify unless you expect growth to accelerate.

Different profile here: big dividend, but not much growth. Typical utility company.

• Current dividend: $3.20 per share
• Expected growth: 2% (about all regulated utilities can manage)
• Your required return: 8%

Next year's dividend: $3.20 × 1.02 = $3.26

Value = $3.26 ÷ (0.08 - 0.02) = $3.26 ÷ 0.06 = $54.33

Notice how much lower this is than the previous example, even though the dollar dividend isn't that different. That's the growth rate at work. You're getting paid now instead of waiting for increases—and the valuation reflects that trade-off.

Same dividend, same discount rate, different growth assumptions:

• Dividend: $5.00
• Required return: 10%
• Growth rate: we'll vary it

A three-percentage-point bump in growth nearly doubled the valuation. This is why being conservative on growth matters so much. Get it wrong by 2%, and you're off by 30%+ on value.

Say you're excited about a company and plug in aggressive numbers:

• Dividend: $2.00
• Growth rate: 8%
• Required return: 9%

Value = $2.00 ÷ (0.09 - 0.08) = $2.00 ÷ 0.01 = $200.00

Two hundred dollars for a stock paying a $2 dividend? That's a 1% yield. The model isn't wrong—it's telling you that your assumptions don't make sense. When growth approaches your discount rate, valuations explode. Treat that as a warning sign, not a buy signal.

This model earns its keep with a specific type of stock:

Stable, mature businesses. Companies past their high-growth phase, with predictable revenues and consistent margins. Utilities, telecoms, consumer staples, established REITs.

Long dividend track records. If a company has paid and raised dividends for 20+ years without cuts, the constant-growth assumption becomes reasonable rather than hopeful.

Modest growth expectations. The model handles 2-5% growth gracefully. Once you're projecting 7%+, the math gets squirrelly and you're better off with other approaches.

Income-focused evaluation. If you're buying for the dividend stream rather than capital appreciation, the Gordon Model directly measures what you care about.

Every model has blind spots. Here are the Gordon Growth Model's:

The "constant forever" assumption is obviously false. No business grows at exactly 4% annually until the end of time. But here's the thing—mature companies often stay within a narrow band (say, 3-5%) for decades. That's close enough for the model to work. Just don't expect precision.

Zero help for non-dividend stocks. The formula literally divides by dividend. No dividend, no output. Growth stocks that reinvest everything need different valuation methods entirely.

Garbage in, garbage out. Your result is a function of your assumptions. Plug in optimistic growth? You'll get an inflated value. Use the wrong discount rate? Same problem. The formula doesn't know if your inputs are realistic—that's on you.

It ignores almost everything about the actual business. Competitive position, management quality, industry disruption, balance sheet strength—none of it shows up in the formula. A stock can look cheap on GGM and still be a terrible investment if the fundamentals are deteriorating.

It breaks near the boundary. When your growth rate approaches your discount rate, small input changes cause massive output swings. That's not the model being sophisticated—it's the model being inapplicable. Back off and use something else.

Think of the Gordon Model as one tool in a larger kit:

Plenty of professional investors use Gordon as a first-pass filter. If a stock looks interesting on GGM, they'll dig deeper with a full DCF. If it looks wildly overvalued, they move on without spending hours on projections. That's a sensible workflow for individual investors too.

The Gordon Growth Model gives you a framework for thinking about value, not a crystal ball. Your calculated result is only as reliable as the assumptions you make about growth and required returns. Use this calculator to quickly screen dividend stocks, compare different investment options, and understand how valuation inputs interact.

For significant investment decisions, combine this analysis with research into the company's financial health, competitive position, and growth prospects. And if you're unsure about an investment, consulting with a financial professional is always a sound approach.