Dividend Projections
How It Works
Step 1: Enter expected dividends for each year in your forecast period.
Step 2: Set a terminal growth rate for dividends beyond the forecast.
Step 3: Set your required rate of return (discount rate).
Result: The calculator discounts each dividend and the terminal value to present value, summing them for intrinsic stock value.
Intrinsic Value
Value Composition
Cash Flow Breakdown
| Year | Dividend | Discount Factor | Present Value |
|---|
Sensitivity Analysis
Understanding the Dividend Discount Model
What is the Dividend Discount Model?
The Dividend Discount Model (DDM) is one of the oldest and most fundamental stock valuation methods. It values a stock as the sum of all its expected future dividend payments, discounted back to their present value. The core principle is that a stock is worth the present value of the cash flows it will generate for shareholders.
The multi-period DDM extends the basic model by allowing you to project different dividend amounts for each year in a forecast period, rather than assuming a constant growth rate from year one.
Multi-Period DDM Formula
P₀ = Σ(Dᴛ / (1+r)ᴛ) + TV / (1+r)ⁿ
- Dᴛ: Dividend in year t
- r: Required rate of return
- TV: Terminal value at year n
- n: Last forecast year
Terminal Value Formula
TV = Dₙ × (1+g) / (r - g)
- Dₙ: Last projected dividend
- g: Terminal growth rate
- r: Required return (must exceed g)
- Based on Gordon Growth Model
When to Use Multi-Period DDM
The multi-period DDM is most useful when:
- Transitional growth: Companies transitioning from high growth to stable growth (e.g., a fast-growing company that will mature)
- Known dividend changes: When management has announced specific dividend changes for upcoming years
- Variable near-term dividends: When dividends won't grow at a constant rate in the near term
- More precise modeling: When you want finer control than the Gordon Growth Model provides
Limitations
- Dividend-dependent: Only works for companies that pay (or are expected to pay) dividends
- Assumption-sensitive: Small changes in growth rate or discount rate significantly impact results
- Terminal value dominance: Heavy reliance on terminal value, which is based on perpetuity assumptions
- Forecast uncertainty: Future dividend projections are inherently uncertain
Frequently Asked Questions
The Dividend Discount Model (DDM) is a stock valuation method that calculates intrinsic value based on the present value of all expected future dividends. The multi-period DDM allows you to project different dividend amounts for each future year, then adds a terminal value representing all dividends beyond the forecast period.
The formula is: P0 = Σ(Dt / (1+r)t) + TV / (1+r)n, where Dt is the dividend in year t, r is the required return, and TV is the terminal value.
The Gordon Growth Model assumes dividends grow at a constant rate forever, using a single formula: P0 = D1 / (r - g).
The multi-period DDM is more flexible - it allows you to project different dividend amounts for each year in a forecast period, then applies a terminal growth rate only after that period. This is useful for companies where near-term dividends may not grow at a constant rate.
Terminal value represents the value of all dividends beyond your explicit forecast period, assuming dividends grow at a constant rate from that point forward. It is calculated using the Gordon Growth Model applied to the last projected dividend:
TV = Dlast × (1 + g) / (r - g)
Terminal value often makes up 60-80% of total intrinsic value, so the terminal growth rate assumption is one of the most important inputs.
The discount rate (required rate of return) should reflect the risk of the investment. Common approaches include:
- CAPM: r = Risk-Free Rate + Beta × Market Risk Premium
- Historical returns: Typically 8-12% for stocks
- Build-up method: Start with risk-free rate and add premiums for equity risk, size, and company-specific risk
Higher risk stocks warrant higher discount rates. Use the sensitivity table to see how different discount rates affect the valuation.
Terminal value often accounts for 60-80% of total intrinsic value because it captures all future dividends beyond the forecast period - an infinite stream of growing cash flows. This is why:
- The terminal growth rate should be conservative (typically 2-4%)
- A small change in terminal growth rate can significantly impact the result
- Extending the forecast period with explicit dividends gives you more control over the valuation
Disclaimer
This calculator is for educational and informational purposes only. It is not financial advice. The Dividend Discount Model is one of many tools for evaluating stocks and should be used alongside other valuation methods and qualitative analysis. Results are highly sensitive to input assumptions. Always verify financial data from official sources and consult with qualified professionals for investment decisions.
