Stock Valuation Calculator
The intrinsic value of a dividend-paying share using the Gordon Growth Model, compared with the price it trades at today.
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- Formula and worked example included
Share Valuation Calculator (Dividend Growth Model)
Enter your figures to see results.
What is a dividend-paying share worth?
If a company pays a reliable, steadily growing dividend, you can value its shares from that income alone: next year's dividend divided by the difference between the return you need and the dividend's growth rate. A 24p dividend growing 3% a year, against an 8.5% required return, values a share at about £4.36. Compare that with the market price.
How to use this calculator
- Enter the dividend per share you expect over the next twelve months, in pounds.
- Enter a sustainable long-run growth rate and the annual return you need for the risk.
- Add the current share price to see whether the model values the share above or below the market.
What your result means
How to read the figure, what counts as normal, and what to do about it.
What the dividend growth model does
The Gordon Growth Model values a share as the present value of all the dividends it will ever pay, assuming they grow at a steady rate forever. It answers a practical question: given the income I expect and the return I need, what is this share worth to me? If that figure is above the market price, the share looks cheap; below it, expensive.
It suits mature, steadily growing companies that pay a reliable dividend: utilities, consumer staples, large insurers, established REITs. It is the wrong tool for growth companies that pay little or nothing, for cyclical businesses whose dividends swing, or for valuing a private company you are buying outright, where an earnings multiple or discounted cash flow is more appropriate.
Choosing the inputs
- Next year's dividend. Take the last full-year dividend and grow it by one year at your growth rate, or use analyst consensus. Check it is covered by earnings; a payout ratio above 80% is fragile.
- Growth rate. No company outgrows the economy forever. Long-run UK nominal GDP growth of 3–4% is a sensible ceiling; the company's 5- or 10-year dividend growth history is the starting point.
- Required return. Start with a risk-free rate (10-year gilt yield) and add an equity risk premium of 4–6%, more for a small or volatile company. Alternatively use the return you could get from a diversified index fund plus a margin for the extra risk of a single share.
Because the answer depends on a small difference between two percentages, always run it with a range of inputs. A model that says a share is worth between £3 and £6 is being honest; one that says £4.36 is not.
Worked example: a FTSE 100 utility
The shares trade at £4.20. Next year's dividend is expected to be 24p, growing at 3% a year. An investor wants an 8.5% return.
Value = 0.24 ÷ (0.085 − 0.03) = 0.24 ÷ 0.055 = £4.36.
That is about 4% above the market price, so the share looks marginally cheap on these assumptions. The implied return at £4.20 is 0.24 ÷ 4.20 + 3% = 8.7%. Nudge the required return to 9% and the value falls to £4.00 and the share now looks marginally expensive. The conclusion is "fairly valued", not "buy".
Frequently asked questions
Why does the model give a negative or huge number?
Because the growth rate is at or above the required return. The model assumes that cannot last forever. Lower the growth assumption to something sustainable, or raise the required return.
Can I use it for a company that pays no dividend?
No. Use a discounted cash flow or an earnings-based comparison instead. Some analysts substitute free cash flow per share for the dividend, which is a different model with different assumptions.
What required return should a UK investor use?
A common approach is the 10-year gilt yield plus an equity risk premium of around 4–6%, giving something in the 8–11% range depending on gilt yields and the company's risk. Use the higher end for small or indebted companies.
Is this how professionals value shares?
It is one of several tools they use, usually alongside price-to-earnings, discounted cash flow and comparisons with similar companies. Its strength is transparency: you can see exactly which assumption drives the answer.
The maths behind this calculator
For anyone who wants to check the working or rebuild it in a spreadsheet.
The formula
Intrinsic value = D₁ ÷ (r − g)
Where D₁ = dividend per share expected next year
r = required rate of return (as a decimal)
g = constant dividend growth rate (as a decimal)
Implied return at market price = D₁ ÷ Price + g The model only works when r is greater than g. If a company could grow its dividend faster than the return investors demand, forever, the shares would be worth an infinite amount, which tells you the growth assumption is wrong, not that the share is a bargain.
Assumptions and limits
- Dividends grow at a single constant rate forever. Companies with a high-growth phase followed by maturity need a two-stage model.
- The required return and growth rate are stable; both move with interest rates and the company's prospects.
- Tax is ignored. UK dividend tax (10.75%, 35.75% or 39.35% above the £500 allowance) reduces the return you actually keep unless the shares are held in an ISA or pension.
- This is an educational tool, not investment advice. Share prices can fall and you may get back less than you invest.
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