The model works where dividends genuinely represent distributable cash: mature utilities, regulated networks, some banks and insurers. It breaks down for companies that return capital through buybacks or reinvest everything.
It is also the clearest illustration of why cost-of-equity and growth matter so much, since the whole valuation sits on the difference between two uncertain numbers in a denominator.
Example: Harbor Row Properties pays $2.40 a share, expected to grow 2.5% with a 7.8% cost of equity. The model gives $2.46 divided by 0.053, or $46.40, against a $43 market price.
Related: cost-of-equity, dividend, perpetuity-growth-rate, discounted-cash-flow, funds-from-operations