The Gordon Growth Model is highly appropriate for valuing dividend-paying stocks that are relatively immune to the business cycle and are relatively mature (e.g., utilities).
It is also useful for valuing companies that have historically been raising their dividends at a stable rate.
2. Where DDM or Gordon Growth Model is difficult to use
Applying the DDM is relatively difficult if the company is not currently paying out a dividend.
A company may not pay out a dividend because:
- It has a lot of lucrative investment opportunities available and it wants to retain profits to reinvest them in the business.
- It does not have sufficient excess cash flow to pay out a dividend.
- growth (with very high growth rates),
- transition (with decent growth rates) and
- maturity (with a lower growth into perpetuity).
- currently undergoing moderate growth, but
- whose growth rate is expected to improve (rise) to its long term growth rate.