What Is the Constant Growth Model?
The constant growth model, also known as the Gordon Growth Model (GGM) or the Dividend Discount Model (DDM) with constant growth, is a fundamental stock valuation method used to estimate the intrinsic value of a dividend-paying stock. Developed by Myron J. Gordon and Eli Shapiro in 1956, this model assumes that dividends grow at a constant rate indefinitely. The formula is elegantly simple: the fair value of a stock equals the next expected dividend divided by the difference between the required rate of return and the dividend growth rate.
This stock constant growth calculator implements the Gordon Growth Model with four calculation modes, allowing you to solve for intrinsic value, required return, implied growth rate, or the expected dividend. Whether you are a value investor screening for undervalued dividend stocks or a finance student studying equity valuation, this free tool provides instant results with a built-in sensitivity analysis table.
The Gordon Growth Model Formula
The core formula of the Gordon Growth Model is:
P₀ = D₁ / (r - g)
P₀ = Intrinsic value (fair price) of the stock
D₁ = Expected dividend next year = D₀ × (1 + g)
r = Required rate of return (discount rate)
g = Constant dividend growth rate
D₀ = Current annual dividend per share
A critical constraint is that the required rate of return (r) must exceed the growth rate (g). When r equals g, the formula produces an infinite value, and when r is less than g, the result is negative — both of which are economically meaningless. This constraint reflects the reality that a stock growing faster than its discount rate would theoretically have unlimited value, which is not sustainable in perpetuity.
How to Use This Stock Constant Growth Calculator
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Choose a Calculation Mode
Select one of four tabs: Intrinsic Value to find the fair stock price, Required Return to determine the minimum return implied by the current price, Growth Rate to find the implied dividend growth rate, or Expected Dividend to calculate the dividend needed to justify the current price.
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Enter the Known Variables
Input the current annual dividend per share (D₀), the expected constant dividend growth rate (g), the required rate of return (r), and the current stock price. The calculator will solve for the unknown variable based on your selected mode.
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Review the Results
The calculator displays the solved value along with supporting metrics like dividend yield, margin of safety, and the complete formula breakdown. In Intrinsic Value mode, you also get a sensitivity analysis table showing how the fair value changes across different growth rates and required returns.
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Analyze the Sensitivity Table
Use the sensitivity analysis to understand how small changes in your assumptions affect the intrinsic value. This is especially useful because the Gordon Growth Model is highly sensitive to the spread between the required return and the growth rate.
Four Calculation Modes Explained
Intrinsic Value
Calculate the fair price of a stock given its current dividend, expected growth rate, and your required rate of return. Compare with the market price to find undervalued or overvalued stocks.
Required Return
Determine the expected total return (dividend yield + capital gains) implied by the current stock price. Useful for comparing investment opportunities and assessing risk-adjusted returns.
Growth Rate
Find the implied constant dividend growth rate that the market is pricing into the stock. Compare this with historical dividend growth to assess whether the market's expectations are realistic.
Expected Dividend
Calculate the current annual dividend a stock would need to pay to justify its market price, given your required return and expected growth rate assumptions.
When to Use the Constant Growth Model
The Gordon Growth Model works best for mature, stable companies that pay regular dividends and have a predictable dividend growth history. Blue-chip stocks, utilities, consumer staples, and real estate investment trusts (REITs) are ideal candidates. The model is less suitable for high-growth companies that reinvest all earnings, cyclical businesses with volatile dividends, or companies that have recently started paying dividends without an established growth track record.
Limitations of the Gordon Growth Model
Constant Growth Assumption
The model assumes dividends grow at a constant rate forever. In reality, few companies maintain perfectly constant dividend growth. For companies with varying growth phases, a multi-stage DDM (such as the H-model or two-stage DDM) may be more appropriate.
Sensitivity to Inputs
Small changes in the growth rate or required return can dramatically alter the intrinsic value, especially when the spread (r - g) is narrow. A 1% change in either variable can shift the fair value by 20-50% or more. Always use the sensitivity analysis table to understand the range of possible values.
Not for Non-Dividend Stocks
The model cannot value companies that do not pay dividends. For growth stocks like many technology companies, alternative valuation methods such as discounted cash flow (DCF), price-to-earnings (P/E) multiples, or free cash flow models are more appropriate.
Growth Must Be Below Required Return
The model requires that the required rate of return exceeds the growth rate (r > g). If a company's dividend growth rate exceeds the discount rate, the model breaks down. This typically means the constant growth assumption is unrealistic for that particular stock.