The official description of the Dividend Growth Model is; 'A stock valuation model that deals with dividends and their growth, discounted to today'.
This model assumes that the basis of the valuation of stock is:

The Current Dividend
Growth of the Dividend
Required Rate of Return
It is best to describe this model by using an example. Assume that a stock is paying $2.00 per year in dividends, growing at 3.5% per year. The so-called variable item in this example is the investors required rate of return, which we will assume is 12.4%.

The formula for the Dividend Growth Model is:

Value = (Current Dividend * (1 + Dividend Growth)) / (Required Return - Dividend Growth)

Now, let's insert the assumptions for the example into this formula:

Value = (N2 * (1 + .035)) / (.124 - .035)
Value = N23.26

Now what does this mean? Basically this means that based on the current situation (the assumptions) this stock should yield a 12.4% average annual return at a price of $23.26.

You might want to look at the required rate of return example for a discussion of that piece of this puzzle.

USE A CALCULATOR: http://www.finplan.com/invest/divgcalc.htm

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Gordon Growth Model

What does it Mean? A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. Given a dividend per share that is payable in one year, and the assumption that the dividend grows at a constant rate in perpetuity, the model solves for the present value of the infinite series of future dividends.

STOCK VALUE (P) = D/ K-G


Where:

D = Expected dividend per share one year from now

K = Required Rate of Return for equity investor

G = Growth rate in dividends (in perpetuity)

Because the model simplistically assumes a constant growth rate, it is generally only used for mature companies (or broad market indices) with low to moderate growth rates.
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