This Dividend Discount Model Calculator helps you estimate the fair value of a stock based on its future dividends. By inputting the discount rate, dividend growth rate, and the annual dividend per share, you can quickly calculate the intrinsic value of the stock.

Use this tool to assess whether a stock is fairly priced, overvalued, or undervalued.

## Dividend Discount Model Calculator

## Formula and Practical Calculation of the Dividend Discount Model (DDM)

The formula for the Dividend Discount Model is:

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This model calculates the intrinsic value of a stock based on its future dividends, adjusted by the discount rate and growth rate.

### Practical Example

Assume a company pays annual dividends of $2 per share, with a dividend growth rate of 4%, and the required discount rate is 8%.

**Using the DDM formula:**

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The intrinsic value of the stock, based on future dividends, is $50 per share.

This result shows the fair value of the stock based on the company’s dividend payments and growth assumptions. If the stock price on the market is below $50, it may be undervalued, offering a potential investment opportunity.

### Key Inputs: Discount Rate, Growth Rate, and Dividends

**Discount Rate:** The required rate of return by investors. Higher discount rates lower stock values.

**Dividend Growth Rate:** The annual percentage increase in dividends. Growth must be less than the discount rate for valid results.

**Dividends per Share:** The annual payout to shareholders per share of stock.

### Limitations and Assumptions

The DDM assumes a constant dividend growth rate, which may not hold true for all companies. It is not suitable for firms that do not pay dividends or have volatile dividend policies.

The model also becomes invalid if the growth rate exceeds the discount rate.

## Comparison with Other Valuation Methods

Unlike the **Price-Earnings Ratio (P/E)**, which focuses on earnings, the DDM is based solely on dividend payments. The **Discounted Cash Flow (DCF)** model, on the other hand, values a company using its cash flows, offering a broader perspective.

Both methods can complement the DDM for more comprehensive stock analysis.

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