Ref
Gordon Growth Model = Dividend$(1+g)/(r-g)
This is the basic model used for valuing dividend-paying common stocks.
Their dividend payments are discounted back to the present.
Only one growth rate is assumed - to continue in perpetuity.
Inputs
$2.50 Dividend$ today (not forward year's)
7.0% Growth rate of payments (g)
10.0% Rate of return required (discount rate r)
Resulting valuation using Gordon model:
The stock is worth: $89.17
showing a 2.8% dividend yield.
Investors may kid themselves into thinking they are deriving a more 'exact' valuation by using models that presume an initial growth phase followed by a slower mature phase. Ever single stock they look at is considered to be growing at a higher rate than is sustainable. Yeh, right! The reality is that the growth rate is a VERY, VERY, VERY rough estimate. There is no way anyone can predict the growth in years's 6-100. The future is unknown. You cannot make any model 'more exact' by simply guessing different numbers.
The other simple models for valuing stocks depend on Earnings $$ instead of Dividends $$. You can reconsile the different models by deriving the ROE of the reinvested earnings that is necessary to generate the original estimate of growth. As you can see below there are huge differences in the required ROE. Conclusion - these models are toooooo simple to be useful. They produce different valuations, none of which is probably 'true'.
Compare the resulting valuation assuming different Price/Earnings multiples
If P/E = 10 : Earnings would be = $8.92
% earnings retained = 72%
Incremental ROE necessary to generate growth = 9.7%
If P/E = 15 Earnings would be = $5.94
% earnings retained = 58%
Incremental ROE necessary to generate growth = 12.1%
Using Benjamin Graham's formula for appropriate P/E
P/E = 8.5 + (2*g) = 22.50
Earnings would be = $3.96
% earnings retained = 37%
Incremental ROE necessary to generate growth = 19.0%
Using P/E derived from PEG ratio = 1
then P/E = g = 7
Earnings would be = $12.74
% earnings retained = 80%
Incremental ROE necessary to generate growth = 8.7%