Dividend Discount Models: Gordon, Two-Stage, and H-Model

Last updated October 29, 2026·6 min read

Some companies return their value in the open, one dividend check at a time. Dividend discount models value those companies on the checks themselves: project the dividends, discount them, add them up. The family has three standard forms, the Gordon growth model, the two-stage model, and the H-model, and they differ only in how they let the growth rate behave. This guide builds all three on Coca-Cola, whose dividend record is long enough to argue with, and shows where each form earns its keep.

The Shared Idea

A share is worth the present value of the dividends it will pay. Everything else is a claim about how those dividends grow. The models take the trailing dividend as their base. For Coca-Cola in late October 2026, the last four quarterly payments were $0.51 and then $0.53 three times, a trailing dividend of $2.10 a share against a price of $92.82, a yield of about 2.3 percent. The company's annual dividend has grown at a compound rate of about 4.6 percent over the last five years, from $1.68 in 2021 through $2.04 in 2025 to the $2.10 trailing figure. Those two facts, the level and the growth, are all any of the three models consumes.

One more input is shared: the required return. The dividend belongs to shareholders alone, so the discount rate is the cost of equity, not the blended cost of capital. Coca-Cola's cost of equity, measured in the WACC guide in this series, is 5.41 percent.

The Gordon Growth Model

The simplest form assumes the dividend grows at one rate forever:

Value = next year's dividend / (required return − growth rate)

At a perpetual growth rate of 3 percent: $2.10 × 1.03 divided by (0.0541 − 0.03), which is $2.163 divided by 0.0241, giving $89.75.

The formula's knife edge is the denominator. Grow the assumption to 4 percent and the value leaps to $154.89. Cut it to 2 percent and the value falls to $62.82. And the same formula at a 9 percent required return, a common preset, prints $36.05, because a 9 percent hurdle against a 5.41 percent cost of equity is not conservatism, it is a different company being priced. The Gordon form is honest only when the perpetual rate is genuinely perpetual: at or below the growth of the economy, and well below the required return. For a mature payer in a steady state, it is the right tool. For anything still changing, it is a photograph presented as a film.

The Two-Stage Model

The two-stage form lets the dividend grow at a higher rate for a set period, then drops to the perpetual rate. Using Coca-Cola's own five-year compound dividend growth of 4.6 percent for the first five years, then 3 percent forever, discounted at 5.41 percent:

• The five near dividends, grown at 4.6 percent and discounted, are worth $10.25 in total.
• The terminal value at year five, the year-five dividend grown at 3 percent and divided by (0.0541 − 0.03), discounted back five years, is worth $86.21.
• The total is $96.46.

The two-stage form fits companies in transition: a payer whose payout ratio is still climbing toward its mature level, or whose near growth is measurably above its permanent rate. Its weakness is the cliff at the stage boundary, where growth drops from the short rate to the long rate in a single year. Real companies fade. They do not step.

The H-Model

The H-model keeps the two rates but fades between them in a straight line over a transition period. Its formula prices the fade directly:

Value = [dividend × (1 + long rate) + dividend × H × (short rate − long rate)] / (required return − long rate)

The H is half the transition length in years. With a ten-year fade, H is five. For Coca-Cola: the first term prices the dividend as a Gordon stream at 3 percent, and the second adds the value of the years spent fading down from 4.6 percent. The result is $96.56.

That the two-stage and H forms land within a dime of each other here, $96.46 and $96.56, is the expected behavior when the short rate is close to the long rate: the shape of the fade matters little when there is little fading to do. The forms separate exactly when they should, on companies whose near growth towers over their permanent rate. In the Studio, when the record supports no separate short rate, the two-stage and H forms reduce to the Gordon calculation, and the family is counted once in medians and blends rather than three times, because one calculation in three costumes is still one opinion.

When the Family Refuses

A dividend model capitalizes income. When the income is a sliver, the output is a sliver dressed as precision. The Studio applies a standing rule: when the trailing dividend yield is under 1 percent of the price, the dividend family reports not meaningful and stays out of every average. Apple is the standing example, at a yield of 0.31 percent. The same discipline applies by hand: check the payout against earnings before trusting any of the three forms. Coca-Cola pays out about 69 percent of its $3.04 of earnings per share as dividends, a covered dividend. A payout above earnings is a company borrowing to keep a promise, and no growth formula repairs that.

Which Form to Use

• Gordon, for the steady payer whose growth has already settled near its permanent rate.
• Two-stage, for a payer with a dated, measurable reason to grow faster for a known period: a payout ratio climbing toward a stated target, a contracted expansion.
• H-model, for the same company when the honest shape of the change is a fade rather than a date.

The free dividend discount model calculator runs all three forms on any payer and prints them together, so the effect of the growth shape, not just the growth rate, stays visible. Inside the Studio, the family stands among the 31 models, weighted once.

Sources

• The Coca-Cola Company dividend record as carried in the Maineblock feed, October 29, 2026: quarterly payments of $0.42 in 2021 rising to $0.53 in 2026; trailing four payments totaling $2.10; price $92.82. Fiscal 2025 earnings per share of $3.04 from the Form 10-K for the year ended December 31, 2025. Filings are public at SEC EDGAR
• The required return of 5.41 percent is Coca-Cola's cost of equity from the Studio's WACC verification record. All model outputs were recomputed from the inputs shown.