The Gordon Growth Model’s Validity in the Modern Era: An Empirical Analysis of its Performance in Valuing Dividend Aristocrats vs. High-Growth Tech Stocks

Abstract

Asserted by the foundational principle of finance, the concept of an asset's value is the present value of its future cash flows. For equities, the Dividend Discount Model (DDM) operationalizes this principle, particularly the Gordon Growth Model (GGM). However, the modern market is increasingly dominated by technology firms that reinvest all profits into growth rather than paying dividends, presenting a fundamental challenge to this traditional framework. This paper investigates the applicability and accuracy of the GGM in the contemporary stock market through an empirical analysis from 2018 to 2023. A comparative analysis was conducted on two portfolios: one consisting of stable "Dividend Aristocrats" and another of high-growth, largely non-dividend-paying tech stocks. The findings reveal a stark divergence. The GGM demonstrated reasonable, though imperfect, accuracy for Dividend Aristocrats, with a low absolute percentage variance of from market prices. In contrast, the model produced fundamentally nonsensical results for high-growth tech stocks, with higher percentage variances, as it logically computed a value of zero for non-dividend payers. This study concludes that the GGM's validity is entirely contingent on a company's investment profile. It remains applicable for valuing mature and income-oriented firms. But for high-growth companies whose value is derived from growth options and future potential rather than current income, it is unequivocally obsolete. These findings necessitate investors adopting a more nuanced toolkit and implementing context-driven approach to teaching valuation in finance pedagogy.