The fastest way to value an income stock

By Deputy editor Tim Bennett Oct 17, 2012

Tim Bennett

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Dividend stocks are a good bet with interest rates at rock bottom. But how do you find a bargain? Tim Bennett introduces one of investing's simplest valuation techniques – the Gordon Growth Model.

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Published in Video tutorials | More articles by Tim Bennett

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  • 1. jimtaylor

    (17 October 2012, 06:38PM)  Complain about this comment

    Another good clear explanation Tim.

    I'm not going to challenge your assumptions as they seem to be reasonable, but there is a sense that you need to have some idea of a sensible price target before doing the calculation to then believe the result.

    I think VOD is good value at the moment because I believe the market is over-reacting to the uncertainty over the continuation of the special dividend and I already had a near term price target of 200p.
    So when your calculation arrived at 227p I then think your assumptions are reasonable, but if a different set of plausible assumptions arrived at 400p I would either disagree with the assumptions or expect the time to arrive at that price to be too long for the assumptions to hold true for that length of time, but only because I already have some expectation of where the price will go to.

  • 2. Impromptu

    (18 October 2012, 01:41AM)  Complain about this comment

    Stripping out the contribution of the special Verizon dividend is perfectly sensible. Anyone considering VOD yield should regard it as a nice surprise. It might be likely, I'll be glad to see it, but I don't plan around receiving it.

    Of course, there's also the concern over 4G spectrum auction - politicians are already salivating over how to spend the proceeds. Given that uncertainty and perhaps a more pessimistic assumption about GDP growth for the foreseeable future, it's understandable that the share price is rather depressed.

  • 3. Tim

    (18 October 2012, 08:54AM)  Complain about this comment

    JimTaylor - agree the assumptions are key and happy to accept that mine won't be the same as everyone else's. I'd say there is a bit of upside in Vodafone at the moment but agree that a target of say 400p would be suspect. Cheers Tim.

  • 4. Tim

    (24 October 2012, 04:22PM)  Complain about this comment

    Sorry I get a result of 22.7272727272 using the maths he gives-where have I gone wrong exactly- 10 divided by 0.44= 22.72?!

  • 5. jimtaylor

    (24 October 2012, 06:21PM)  Complain about this comment


    10/(0.089-0.045) = 227.27p

  • 6. Tim

    (25 October 2012, 09:00AM)  Complain about this comment

    Thanks Jim!

  • 7. caronia

    (26 October 2012, 02:08PM)  Complain about this comment

    Hi Tim,
    I'm new to investing and find your videos really helpful as a source of reference.
    I would like to ask whether large blue chip companies always issue bonds and if so where might I find information on them to factor in their yield to allow me to make the calculation using The Gordon Growth Model?
    Many thanks.

  • 8. John

    (05 November 2012, 05:37PM)  Complain about this comment

    Thanks for a nice simple model. If a long term bond cannot be found for a given company would it be valid to substitute for example the average FTSE yield or an aspirational yield that one would like to achieve? I always worry about formulae based on many assumptions producing spurious levels of accuracy. Have you pragmatically established any confidence limits for the model?

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