(Understand that in this model, you're assuming that the dividend will grow forever at a set rate, which is obviously impossible, but models aren't real life. This rate also shouldn't realistically exceed the growth for the overall economy in which your stock operates
-- national or global -- by more than about two percentage points to really be considered sustainable.)
The formula used by the GGM is:
Value of Stock = DPS1 / (r – g)
So, if you have a theoretical stock listed at $125, its predicted dividend is $3 for next year, the dividend's growth rate is 5% annually, and you want to see an 8% rate of return, that looks like this:
Value of Stock = $3 / (.08 – .05) = $100
If you were to invest in this stock today at $125, you could expect to have overpaid a fair amount since your GGM shows it's only worth about $100. However, if you scooped it up at $90, you probably did well. (Please note: The GGM is not the only factor to consider when pricing and choosing stocks)
Limitations
Predicting future stock prices is not the easiest thing to do, but some models can help you have a better idea of the value of a stock in the future. However, the stocks you can use these models with are limited to those that have consistent growth rates and a long history to display steady growth trends.
So, for example, you wouldn't be able to use this with most tech stocks or other growth stocks. They have largely not had much of a track record, and their stock prices can be more easily influenced by market sentiment rather than variables like steady dividends or reliable earnings.
Also, you need to be very aware of the global economic environment. If the economic picture is solid and no hiccups are present, your models could be fairly spot on, but when things become erratic and unpredictable -- as they have been, more or less, since the COVID-19 pandemic -- trending data can also become a lot less reliable.