1. What is the Dividend Growth Model?

The Dividend 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 its future dividend payments, discounted back to their present value. This model assumes dividends will grow at a constant rate indefinitely.

2. How Does the Calculator Work?

The calculator uses the Dividend Growth formula:

Where:

• \( Dividend \) — Annual dividend payment in USD
• \( r \) — Discount rate (required rate of return) in decimal form
• \( Monthly\ g \) — Monthly dividend growth rate in decimal form

Explanation: The model calculates the present value of an infinite series of future dividends that grow at a constant rate.

3. Importance of Dividend Valuation

Details: This model is particularly useful for valuing mature companies that pay consistent dividends. It helps investors determine whether a stock is overvalued or undervalued based on its dividend payments.

4. Using the Calculator

Tips: Enter the annual dividend in USD, the discount rate as a decimal (e.g., 0.08 for 8%), and the monthly growth rate as a decimal. The discount rate must be greater than the growth rate for the model to work.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between annual and monthly growth rate?
A: The monthly growth rate compounds to give the annual growth rate. For small growth rates, monthly growth ≈ annual growth/12.

Q2: What discount rate should I use?
A: Typically use your required rate of return or the company's cost of equity capital.

Q3: What are limitations of this model?
A: It assumes constant growth forever, which may not be realistic. It also doesn't work for companies that don't pay dividends.

Q4: How accurate is this model?
A: It works best for stable, mature companies with predictable dividend growth. Less accurate for high-growth or non-dividend-paying companies.

Q5: Can I use this for non-monthly dividends?
A: Yes, but you may need to adjust the growth rate to match your dividend frequency.