Stocks for the Long Run : the Definitive Guide to Financial Market Returns and Long-term Investment Strategies

The Gordon Dividend Growth Model

The belief that growth automatically boosts stock prices grows out of
the misuse of a popular model for valuing stocks—namely, the Gordon
dividend growth modeldeveloped by Roger Gordon in 1962.^6 In Chapter
7 we noted that the price of a stock is the present value of all the future
dividends. It can be easily shown that if dividends grow in the future at
a constant rate g, then the price per share of a stock Pcan be written as
follows:

P

d

r–g

126 PART 2 Valuation, Style Investing, and Global Markets

FIGURE8–1b

Long-Term Stock Returns for 25 Developing Countries against Each Country’s Average Real GDP

Growth, Various Starting Years through December 2006

(^6) Myron J. Gordon, The Investment, Financing, and Valuation of the Corporation, Homewood, Ill.: Irwin,
1962.