As a resource, check out our free dividend discount model available for download. I use the short-form dividend discount model sparingly to determine rough estimates for additions to my dividend growth portfolio. Building a dividend growth portfolio should be relatively straightforward. Develop a method of repeatable steps. Once you do that, building a dividend portfolio will be like clockwork. Our free dividend discount model calculator is a great way to get involved in dividend growth investing. Let’s dive into our dividend growth model calculator and how to download this awesome excel valuation tool.
Dividend Growth Model Calculator: Free Excel Valuation Model
In order to evaluate investment opportunities effectively, you must analyze the numbers to arrive at your investment conclusion.
“Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1”
-Warren Buffett
The dividend discount excel model can be used in a variety of ways. Before you download the dividend discount model calculator, let’s discuss a few important points. This will help you understand our excel version of the dividend discount model.
I’ve been a big fan of dividend investing and the various methodologies for becoming a dividend growth investor.
I love dividends so much that I wrote a book on it titled:
Dividend Investing Your Way to Financial Freedom
My book on dividend investing was named the #1 new release for stock market investing!
Like my book, I want to provide enough resources for you to succeed with dividend investing. This is why I created a dividend discount valuation model that you can download completely free on excel. This resources should help you take the next step in dividend growth investing by using some of the best tools for success.
My goal is to live off dividends forever. Therefore, I use the dividend discount calculator with every investment.
What is the Gordon Growth Model (short-form dividend discount model)?
The dividend discount model (DDM or the Gordon Growth Model) is a method of valuing a company’s stock price based on the theory that its stock is worth the sum of all of its future dividend payments discounted back to their present value. The short-form of the dividend discount model just takes a multiple of pro forma dividend payments.
It certainly has its limitation in practical use. However, it can be used as a decent barometer to tell if you should continue digging into the dividend growth stock further.
The model is named in the 1960s after professor Myron J. Gordon, but Gordon was not the only financial scholar to popularize the model. In the 1930s, Robert F. Weise and John Burr Williams also produced significant work in this area.
There are two forms of the model: the short-form (stable) model and the multistage dividend growth model. For our analysis, we will only focus on the stable (short-form) dividend discount model.
The DDM excel calculator is a great way to get a gut check on a dividend stock.
Dividend Discount Model Formula (Gordon Growth Model)
The dividend discount model formula definition is as follows:
Value of a stock = Next Year’s Expected Annual Dividend Per Share / (Rate of Return – Expected Dividend Growth Rate)
Or said another way, the value of a stock equals next year’s expected annual dividend per share divided by the difference between the rate of return the expected dividend growth rate. By doing this, you are essentially using a multiple on next year’s dividend per share. This is similar to a capitalization rate and assumes these rates happen into perpetuity.
Here is the true definition of the Gordon Growth Model:
Value of stock = D1/ (k – g)
where:
D1 = next year‘s expected annual dividend per share
k = the investor’s discount rate or required rate of return, which can be estimated using the Capital Asset Pricing Model or the Dividend Growth Model (see Cost of Equity)
g = the expected dividend growth rate (note that this is assumed to be constant)
For inputting your future growth rate, do not just use 1-year of historical dividend growth rate. I would suggest taking at least a 5-year average at a minimum. Remember, historical results are not representative of future performance.
Take it with a grain of salt since it is a bit more of an art than a science. Forecasting the dividend growth rate is the most important input into the model.
How to forecast the dividend growth rate? (This is the most essential input of the dividend discount calculator)
Forecasting the dividend growth rate is very important when using the short-form dividend discount model. This is due to the fact that you are in short-form. You are only relying on one-year to forecast into perpetuity for the dividend income stream of a particular stock.
I suggest that you sensitive a range of forecasted dividend growth rates to ensure that you have a range of value for your particular dividend growth stock.
Then, ask yourself a few questions to determine the qualitative characteristics of your forecast. By taking the historical average dividend growth rate for at least five years, you have a baseline to go off of to increase or decrease your forecasted dividend growth rate.
Here are a few questions to consider as you evaluate the dividend discount calculator and the valuation inputs.
- What is the anticipated next fiscal year earnings growth for dividend stock?
- Determine the payout ratio of the dividend stock. Is this going to maintain earnings growth?
- What is the long-term earnings growth of the dividend stock?
- Determine the industry outlook. Is the industry expected to grow?
Instead of using the short-form dividend discount model, you can use the two-stage dividend growth model to build an exact annual analysis of the dividend growth rate. This will result in a more accurate approach.
If you need a quick and dirty analysis, the short-form dividend discount model calculator is the right choice.
How to Use the Dividend Discount Model in Excel
Using the dividend discount model can be a great way to start building a dividend growth portfolio. You dividend portfolio should be built by acquiring undervalued dividend growth stocks that have a long-term opportunity at growth.
As I mentioned, the dividend discount model (Gordon Growth Model) calculator has its limits. The model basically assumes an infinite share price or that the dividends received will be into perpetuity.
A residual income valuation can only be relied upon slightly since there are a number of risk factors in the future that need to be taken into consideration.
In order to use the short-form dividend discount model, follow these steps and you will be on your way to building a dividend growth portfolio:
- First, input your estimates in the blue cells.
- Use the links below to input your estimates in the pink cells
- Fair value estimate is in the green text
Let’s get into how to download our dividend discount calculator.
Free Downloadable Dividend Growth Model Calculator
Our dividend discount model calculator is a great way to check the residual income valuation of a dividend growth stock. In addition, the dividend discount model calculator can help you determine the feasibility of the rate of dividend growth.
Our dividend growth excel model should serve as a good dividend growth model example. Feel free to tweak or update as you see fit.
Plug in a few Dividend Kings. Dividend Kings are stocks that have increased their dividend for 50 consecutive years. These stocks have stable, continued dividend growth, so they are a great place to start.
Download the Dividend Growth Model Calculator now
If you think that the dividend growth model calculator can help you invest in undervalued dividend stocks, then I highly suggest that you download the excel version of the model and get started. This can be a great tool for any investor.
The short-form dividend discount model is not meant to be an end all, be all analysis. You must do additional homework to complete your investment decision.
However, I like to use the dividend growth model calculator as a short baseline to get started on my analysis for dividend growth investing.
Considerations Beyond the Dividend Valuation Model Calculator
I always have issues when people look only at the annual dividend yield of a stock to determine an investment decision. When buying a car, would you buy a car solely because of its gas efficiency? No. You would ask what is the safety rating?
Does it have comfortable seats? Is it expensive? Ok, you get my point. So what investment considerations do you need to take into account before investing in a dividend growth stock?
- Free cash flow and profit growth expectations
- Financial health including balance sheet and quality of earnings considerations
- Management team
- Reputation in the industry
- Do you understand the business model?
These considerations are important to evaluate after you have input your dividend growth stock in the valuation model.
Use the dividend discount calculator first once you like the attractiveness of the stock valuation.
Steps to Use the Dividend Discount Calculator
While you need to know the other aspects of the business, you should always use the dividend discount calculator first. Here is how I think about the steps in the valuation process of evaluating dividend growth stocks:
- First, determine if the stock has an attractive valuation from the stock screeners you use
- Then, input the stock’s metrics in the dividend discount calculator
- If everything checks out in the dividend discount model in excel, then proceed by reading more about the company to understand the above considerations such as management team, reputation, business model, etc.
Then, sit back and relax. Go out and enjoy yourself while you earn passive income through dividends.
Consider one of these investment apps to start investing effectively.
Dividend Valuation Model Calculator Conclusion
The Gordon Growth model calculator is a great tool for any aspiring dividend investor. I think it can be an effective excel model for evaluating a stock further. However, it shouldn’t be the end all be all analysis for investing in dividend growth stocks.
When investing, the KISS (Keep It Simple Stupid) method applies. We are not traders.
We invest in sustainable businesses over the long-term. That is the only way to use compound interest to your advantage…
Compound interest is your friend. My favorite quote applies here:
“The best time to plant a tree was 20 years ago. The second best time is today.”
Find your favorite Dividend Aristocrat or Dividend King. Then, start crunching the numbers. What are you waiting for? Become a dividend growth investor and go plant your tree.
Our dividend calculator can show you the benefits from dividend investing and compound interest.
With the Personal Capital Retirement Planner, we’ve been able to manage our dividend income more effectively.
I love the intuitive dashboard and tracking. I highly suggest that you sign up for Personal Capital if you’d like to improve your retirement position.
Other Downloadable Tools:
Related Investing Resources:
- My approach to investing including a comprehensive approach on how to invest money
- Our guide to the best robo-advisors
- How to use these different 401(k) fee calculators
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