Tuesday, August 18, 2015

Dividend Drill Return Model (DDRM) for Dividend Stock Investing

Soon after I started DGI investing, I have used the DDRM method to estimate my return in investments of my dividend growth stock purchases.

The Dividend Drill Return Model is fully described in Josh Peter's Ultimate Dividend Playbook.

You can read more here:

I like the DDRM method since it provides a forward view (assuming you use forward looking information ie ROE, EPS).

I have a fairly long term outlook, so I like to be conservative on my estimates. I typically use a threshold of 10% for my ROI. You can choose a higher number. Basically, this typically means that you have to hold out for a lower entry price.

For riskier stocks, like technology companies, I also include a 2% premium for my rate of return. In other words, the ROI needs to clear 12% (10% basic, 2% risk premium).

I have created a google sheets spreadsheet for you to play with.

(** UPDATE 8/27/2019 **)


Note: you need to make a local copy on your google drive. You can enter data in the yellow cells. You enter the ticker in cell A1.

In the following example, I used AAPL. The google sheet auto populates the ROE (41%) and EPS. These ratios are based on recent information - and you probably need to change the values for a forward looking view.

If you leave it unchanged, the dividend growth rate is quite high - which is unrealistic for a company to continuously grow at this rate. This is because the ROE is very high.

For AAPL, I manually adjusted to a more conservative ROE which is close to the 5 yr median. Even this is slightly aggressive in my opinion. Also, I chose a pretty conservative key growth value. Remember, we are looking forward for 20 years, so we need to be realistic.

Manual DDRM
Dividend Rate ($)2.10
Divided by: share price116.50
Current yield (%)1.80
Core Growth Estimate (%)8.00
Divided by: ROE (%)22.00
Multiplied by: EPS ($)8.65
Cost of Growth (%)3.15
Earnings per Share ($)8.65
Minus: Dividend2.10
Minus: Cost of Growth3.15
Funding Gap ($)3.41
Divided by: Share Price ($)116.50
Share Change (%)2.92
Core Growth (%)8.00
Plus: Share Change (%)2.92
Total Dividend Growth (%)10.92
Plus: Dividend Yield (%)1.80
Projected Total Return (%)12.72

This gives a return of 12.72% which clears my 12% threshold.

Now, to validate this return, I normally use two instances of the Gordon growth model.

The first is using a dividend growth rate per the DDRM model which is less conservative.

Dividend Rate ($)2.10
Required Return (%)12.00
Div Growth (%)10.92

The second is the estimate core growth rate which is more conservative.

Dividend Rate ($)2.10
Required Return (%)12.00
Est Growth (%)8.00

I usually compare these numbers with the middle and low points of my yield theory spreadsheet.

Basically, my fair value is somewhere in the middle - in the 120s.


Another way to determine the validity of the results is to 'hold' your estimated return to your required return. You can do this by adjusting the price in the manual DDRM portion until you get your desired rate of return.

I also compare with M*, Capital IQ and my PE and Yield Theory trends to get a ballpark estimate.

Note: The DDRM model's results depend on the input data. If you enter garbage, you will get garbage out.

Note: The Gordon Growth model assumes a company provides a dividend and the growth is not higher than the rate of return/required return.

Anyway, I hope you have fun the DDRM model. I certainly found it useful for me to compare estimate return on my investments for different companies.


Disclosure: I currently don't have any positions with AAPL


  1. Thank you for this D4s! I am definitely going to play around with this tomorrow and see what I get. I'm always looking for more objective ways to evaluate stocks!

    1. Adam, thanks for the support.
      I hope the DDRM spreadsheet is useful for you. Again. This is just one of many tools to get an estimate.

  2. Thanks for sharing, D4S. I will be reading through this model and playing around with the spreadsheet to learn more.


    1. Thanks R2R. I hope you find it useful.

  3. The DDRM is a fantastic tool. I just finished reading The Ultimate Dividend Playbook a couple weeks back. It definitely gives a quick idea of what you can expect going forward.

    1. PIP, Thanks! I am glad you find it useful. I really like the way that you can choose historical or future inputs. For REITs, there is a slightly modification, but I agree it's really useful.

  4. Hi, I've noticed that some links to yahoo finance don't work anymore.
    Is there an update of the spreadsheet possible?