How to Calculate Stock Prices From Dividends

by C. Taylor

According to the Gordon constant growth model, a stock's price is directly related to its dividends, dividend growth rate and the stock's expected growth. By analyzing all these factors, the Gordon model shows where the current stock price should be, which allows you to delineate between an overvalued or overvalued stock. This information can also extrapolate future stock prices by adjusting the dividend payout amount with respect to its growth rate.

1. Talk to your stock broker and obtain the stock's annual dividend payout, dividend growth rate and expected stock growth.

2. Add one to the dividend growth rate and raise it to the nth power, where "n" is the number of years into the future for which you wish to calculate the stock price. Multiply this figure by the current dividend payout. As an example, suppose you wanted to calculate the stock price two years from now on a stock that pays $3 per share and is expected to grow 4 percent each year. You would raise 1.04 to the power of 2 and then multiply that by $3. This gives you an expected second-year dividend of $3.24. If you only wish to calculate the current stock price, omit this step.

3. Subtract the dividend growth rate from the stock's expected growth. In this example, if the stock's expected growth rate was 9 percent, you would subtract 0.04 from 0.09 to get 0.05.

4. Divide this figure into the dividend payout. In this example, divide $3.24 by 0.05 to get an expected second-year stock price of $64.80