Editor: unfortunately the data source on the stock prices sunset. We’ll update the main feed when we update this for the new IEX API (see the Stock Return Calculator)
This page contains a dividend discount model calculator to estimate the net present value of an investment based on the future flow of dividends. You can change the dividend growth rate, discount rate, and the number of cycles of DDM to perform.
As a bonus, it additionally includes dividend lookups for 2,000+ publicly listed US stocks and can automatically populate dividend history.
Dividend Discount Model Calculator with Automatic Dividends
Data from Sharadar.
Note: Valuations produced by this calculator are for informational use only and should not be taken as advice to trade or hold individual securities. Do your own due diligence on inputs and valuations.
Using the Automatic Dividend Discount Model Calculator
The dividend discount model valuation calculator allows customization with a few advanced options. It uses Dividends per Share to run valuations and allows you to change options around perpetual modelling.
Stock DDM Base Parameters
- Current Stock Price – The current stock trading price. This may be up to a week out of date if you use the auto-populate feature (see the methodology on our Stock DRIP Calculator).
- Discount Rate (%) – Sometimes called the guaranteed return – “what you could earn annually elsewhere”.
- TTM Annual Dividends Per Share ($) – The trailing twelve month dividends paid out on an investment.
- Dividend Growth (%) – The annual percentage you expect the dividend to grow over the next X years, where X can be changed (see below). Be careful with this number when auto-populating! Companies initiating dividends recently might show very high annual growth – beware before projecting forward.
Advanced Options (Optional)
- Years of Above Growth – Number of years to project the above growth rate forward before switching to perpetual growth. By default, we use five years.
- Perpetual Dividend Growth (%) – The perpetual growth in in dividends per share once the X years (above) run out – for safety, we assume dividends will be flat by default. Feel free to tweak that.
- Ticker Symbol – You can find more information with Sharadar (Ed: data deleted) – there are a bit more than 2,000 tickers with information in the tool. Note that fundamentals come from the last annual report filed by a company. Tweak the numbers to account for recent changes.
Dividend Discount Model Valuation Output
- Calculated Dividend Discount Model (DDM) Value – Estimated fair value per share using the dividend input assumptions.
- Over / Under Value Percentage – Versus the current stock price field, this rates how overvalued or undervalued the stock is in this model.
What is the Dividend Discount Model?
The dividend discount model assumes a stock’s fair value is the value of future dividend payments. Estimating dividend growth on top of today’s payout minus a discount rate leaves you with a theoretical reasonable value.
How to Use a Dividend Discount Model Analysis
While not as common as a Discounted Cash Flow model, the Dividend Discount Model is also a bottom-up valuation model which values stock based on some sort of cash flow. While DCF uses earnings (or free cash flow), the Dividend Discount Model uses the future payout of dividends to value a security.
Of course, (as with many forms of valuation) this model has problems with high growth companies. Smaller cap firms tend not to pay as many dividends as mid-to-larger cap corporations. The model falls flat in this scenario – it will report a non-dividend paying stock as ‘worthless’.
The ideal valuation to model with DDM is a mature company with a well-established dividend growing at a constant rate. In that situation, dividends tend to be very stable with constant and relatively predictable dividend increases.
How should I customize a DDM calculation?
As usual, there are still a few levers you need to carefully consider:
Discount rate is the return you could achieve executing some default investment strategy. To set a good number, our S&P 500 Historical Return Calculator shows trailing returns on the S&P 500 Index and might provide some good hints.
Dividend growth is the annual rate you predict the company will increase dividends going forward. When the calculator estimates this, it applies the growth to the last year and extrapolates growth forward. Some auto-populated numbers are… unbelievable, especially when dividends initiate mid-way through the year for a stock. Be sure to check and adjust this rate in your analysis.
DDM: An Overlooked Yet Useful Stock Valuation Method
While it doesn’t match discounted cash flow analysis in popularity, the dividend discount model is a great model to have in your toolbelt. Working off the theory that stock value is based on the sum of future cash flows, there is no cash flow more real than dividends.
Recognize the limitations… but also recognize the strengths. When you see a good place to apply the dividend discount model, this page will be waiting for you. Also see the discounted cash flow valuation tool, the Graham number calculator, and the stock return calculator.