What advantage does the Gordon growth model have compared to the capital asset pricing model (CAPM)?

The Gordon growth model, also known as the dividend discount model, is particularly advantageous because it allows for a straightforward calculation of a stock's present value based on expected future dividends that grow at a constant rate. This model is especially useful in scenarios where a company has a stable growth rate for its dividends, making it easy to apply and understand.

In contrast to the capital asset pricing model (CAPM), which incorporates various risk factors and can be complex due to its reliance on expected market returns, beta, and the risk-free rate, the Gordon growth model simplifies the valuation process. By focusing strictly on dividends and their growth, it enables investors to quickly estimate a stock's value without needing to analyze extensive historical data or market volatility patterns.

This ease of understanding and relatively accurate forecasting in stable growth environments enhances its practicality for investors who prioritize dividend income and who may prefer a less involved modeling approach in stable market conditions.