Financial Education

The Gordon growth model is a type of dividend discount model used to value companies expected to grow at a constant rate forever. Most valuation models forecast growth for a certain time period before reverting to a Gordon growth model to estimate the ending value.

Strengths:

• Especially useful for valuing stable-growth dividend paying companies
• Useful for valuing broad-based equity indices
• Simplicity and clarity
• Helpful in understanding relationships between value, growth, required return and payout ratio
• Useful for estimating expected rate of return

Weaknesses:

• Output highly sensitive to assumptions for growth rate and required return
• Not practical for valuing non-dividend paying companies
• Not practical for valuing dividend paying stocks with unstable growth characteristics

For more information, see all articles on: Investing in Stocks, Valuation

See also:

The Gordon Growth Model

Strengths and Weaknesses of Multi-Stage Dividend Discount Models

Strengths and Weaknesses of the Residual Income Model

Multi-Stage Dividend Discount Models

The H-Model Dividend Discount Model