Stock Constant Growth Calculator

Value a dividend-paying stock using the Gordon Growth Model (constant growth).

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Jurisdiction: United States (IRS & SSA Standards)
Tax Year / Constants: 2026 Statutory Limits
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The Mathematical Formula

Intrinsic Value P₀ = D₁ / (r - g) = [ D₀ × (1 + g) ] / (r - g)

Variable & Parameter Definitions

  • P₀ Theoretical fair intrinsic value per share today.
  • D₀ The most recent annual dividend paid per share.
  • D₁ Expected next-year annual dividend per share (D₀ × (1 + g)).
  • r Required rate of return (investor hurdle rate or cost of equity derived from CAPM).
  • g Constant perpetual annual dividend growth rate (must be strictly less than r).

Real-World Worked Scenario: Valuing a Mature Dividend Aristocrat Stock

A mature utility or consumer staple company paid a $3.00 annual dividend last year. The dividend is projected to grow at a perpetual 4.0% annual rate. An investor requires a 9.0% rate of return.

  1. Next Year Expected Dividend (D₁): $3.00 × (1 + 0.04) = $3.12 per share.
  2. Denominator Spread (r - g): 0.09 - 0.04 = 0.05 (5.0%).
  3. Intrinsic Value Calculation: $3.12 ÷ 0.05 = $62.40 per share.
  4. Investment Decision: If the stock is currently trading in the market at $54.00, it is undervalued by $8.40 per share (a 15.5% margin of safety).
Key Financial Takeaway: The Gordon Growth model demonstrates that intrinsic value is extremely sensitive to the spread between required return (r) and dividend growth (g).

Strategic Insights & Pitfalls to Avoid

  • ✓ The Mathematical Limit: The dividend growth rate (g) must always be less than the required return (r); if g ≥ r, the formula produces a nonsensical negative or infinite value.
  • ✓ Applicability: Best suited for mature, stable "Dividend Aristocrats" with predictable cash flows (utilities, consumer staples, healthcare).
  • ✓ Realistic Long-Term Growth: A company perpetual dividend growth rate cannot realistically exceed long-term GDP growth (roughly 3% to 4%).

Frequently Asked Questions

Why does the Gordon Growth model fail for high-growth tech stocks?

High-growth technology companies rarely pay steady dividends, opting to reinvest cash flows into R&D and capital expenditures. Multi-stage DCF models are required instead.

What happens to intrinsic value if required return (r) increases?

When interest rates or required returns rise, the denominator (r - g) expands, driving down the present intrinsic value of the stock.

How do I determine the required rate of return (r)?

Most financial analysts derive r using the Capital Asset Pricing Model (CAPM): Risk-Free Rate + Beta × Market Risk Premium.

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