For generations, the Gordon Growth Model (GGM) has helped investors put a rational price on dividend-paying shares. As 2025 brings shifting economic conditions, regulatory tweaks, and a renewed focus on income investing in Australia, understanding this classic valuation method is more relevant than ever.
What Is the Gordon Growth Model?
The Gordon Growth Model, also known as the Dividend Discount Model (DDM), is a formula used to estimate the fair value of a share based on its expected future dividends, assuming those dividends grow at a constant rate. The formula is elegantly simple:
- Value = D1 / (r – g)
Where:
- D1 = Expected dividend in the next year
- r = Required rate of return (discount rate)
- g = Expected dividend growth rate
This model is particularly suited for mature, stable companies—think banks, telcos, or blue-chip miners—that pay regular, growing dividends.
Why the Gordon Growth Model Matters in 2025
Australia’s investment landscape is in flux. The RBA’s cash rate has stabilized in the mid-4% range, and dividend-paying stocks are regaining favour as economic growth moderates. Here’s why the GGM is especially relevant now:
- Dividend Focus: Australian investors prize franked dividends for tax advantages. The GGM puts these payouts at the centre of the valuation process.
- Interest Rate Impacts: With borrowing costs steady, income streams from equities are being weighed against fixed-income alternatives. The GGM helps you compare expected returns on a like-for-like basis.
- Policy Updates: In 2025, APRA’s latest guidance on bank capital requirements and ASIC’s push for clearer dividend disclosure have made future dividends more predictable—an ideal scenario for applying the GGM.
Example: Suppose Commonwealth Bank (CBA) is expected to pay a $4.00 dividend next year, growing at 3% annually. If your required return is 7%, the GGM values the share at $4.00 / (0.07 – 0.03) = $100.00.
Strengths, Limitations, and Best Practices
The GGM’s simplicity is both its greatest asset and its main weakness. Here’s how to use it wisely in 2025:
- Strengths:
- Ideal for mature, dividend-stable companies (e.g. ASX20 stocks)
- Easy to apply with just three inputs
- Great for comparing high-yield shares
- Limitations:
- Assumes a constant dividend growth rate—unrealistic for volatile sectors
- Highly sensitive to small changes in growth or discount rates
- Not suitable for companies with irregular or no dividends (e.g. tech startups)
Best Practice Tips for 2025:
- Use realistic growth rates—factor in economic forecasts and sector outlooks
- Adjust the discount rate to reflect your risk tolerance and current RBA policy
- Cross-check results with other valuation methods (like P/E ratios or discounted cash flow models)
For Australian investors, also consider franking credits, which can boost effective dividend yields and impact your required return calculation.
Case Study: Applying the GGM to Telstra in 2025
Telstra (TLS) has returned to steady dividend growth following its 2023-24 turnaround. Analysts expect a $0.18 dividend in FY26, growing at 2.5% annually. If your required return is 6%, the GGM suggests a fair value of $0.18 / (0.06 – 0.025) ≈ $5.14. With Telstra’s share price trading around $4.80 in early 2025, this signals potential upside for yield-focused investors.
Conclusion
In a market hungry for reliable income, the Gordon Growth Model remains a powerful—if sometimes blunt—tool for valuing Australia’s dividend stalwarts. As 2025 unfolds, investors who understand its strengths, respect its limits, and apply it alongside other methods will be best positioned to spot genuine value in a changing landscape.
