Gordon Equation: What Is It Projecting?

Gordon Equation

"If one of life's secrets is … keep your head when all those around you are losing theirs, then the Gordon Equation is the collar that will keep it there." – William J. Bernstein.

When discussing the Gordon Equation, we do not want to confuse the simple investment equation with the Klein-Gordon physics equation.  A Google search for the Gordon Equation will bring up both, so don't be confused.  The two variables in the Gordon Equation are dividend yield and dividend growth as shown in the following equation.

Expected Market Return = Dividend Yield + Dividend Growth Rate. 

It is easy to find the current Dividend Yield (DY) for a broad market index such as the S&P 500 (SPY) or the VTSMX index fund.  The DY for the S&P 500 currently stands at a very low 1.76% and the DY for a broad market index fund such as VTSMX is an even lower 1.64%.  Keep in mind these values will change from week to week.

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