Dividend discount valuation: How we calculate
Value a share under a constant annual dividend growth scenario.
How we calculate
The dividend discount model (DDM) values a share from assumed future dividend payments. Gordon model: next year’s dividend is divided by required return less perpetual growth. Required return must exceed growth.
What the figures mean
- Valuing future money today
A future amount is reduced using the chosen required return to compare it with money today. This is discounting, not a shop discount or solely an inflation adjustment.
Simple example: €110 in one year at a 10% rate corresponds to €100 today.
Worked example
Suppose the current dividend per share is €2, required annual return is 10%, and perpetual dividend growth is 4%. Next-year dividend D₁ = 2 × 1.04 = €2.08. The Gordon model gives 2.08 / (0.10 − 0.04) ≈ €34.67 per share. At a market price of €30, that is about 15.57% above the price. This is neither a market forecast nor a buy recommendation.
The model assumes constant perpetual growth and a required return above that growth. A one percentage point change in either assumption can materially alter the result. Irregular or absent dividends require a different model.