Dividends Growing Faster than Cost of Capital
I don't think the method falls short, it's the premise that is wrong. If the dividend stream really did grow faster than the cost of capital indefinitely, eventually the company behind the share would become larger than the entire economy. Logically, at some point, the growth must slow down.
You should never invest in a stock just for the dividend. Dividends are not guaranteed. I have seen some companies that are paying close to 10% dividends but are losing money and have to borrow funds just to maintain the dividends. How long can these companies continue paying dividends at this rate or at all. Would you keep investing in a stock paying 10% dividends per year where the share price is falling 20% per year? I know I wouldn't. Some high dividend paying stocks also tend to grow a lot slower than lower or non dividend paying stocks. You should look at the total return - both dividend yield and capital return combined to make a better decision. You should also never stay in a stock which is falling drastically just because it pays a dividend. I would never stay in a stock that falls 20%, 30%, 50% or more just because I am getting a 5% dividend. Regarding taxation, some countries may have special taxation rules when it comes to dividends just like they may have special taxation rules for longer term capital gains compared to shorter term capital gains. Again no one should use taxation as the main purpose to make an investment decision. You should factor taxation into your decision but it should never be the determining factor of your decisions. No one has ever become poor in making a gain and paying some tax, but many people have lost a great portion of their capital by not selling a stock when it has lost 50% or more of its value. Let me ask you something else: If you knew about a company that makes $1 million of profit per year and growing, with costs that are half that, would you not be interested to have a stake in this company?  Of course you would. And because the shares can be publicly bought, you can. I don't think you'd care if it's an asset manager or some other company.  An asset manager can do a lot with the capital it raises. It could get bigger and better offices, invest in a better computer system, maybe get faster access to exchange information, better information terminals, have more money for marketing and road shows. But the really big cash usually goes to acquire new talent. You might not need that much money for support staff, but a sales manager can be expensive, and a good fund manager can easily cost a high 7 to 8 figure number per year. &gt;I say better to distribute cash to the shareholders who can then choose for themselves whether to reinvest it in the company or elsewhere.  Why shouldn't Apple (which I agree with you is butchering its shareholder's returns) reinvest the money in the company or in other ventures that produce returns for shareholders?  My argument was simply that dividends diminish the earnings potential of firms' future cash flows. Now, if they are unable to find or invest in positive NPV projects, then I would agree a dividend payment is the best route to go.  However, I find that highly suspect for firms like Apple, Microsoft and GE. They may not be able sustain double-digit growth rates, but given strong balance sheets and cost of capital, they surely should be able to find positive NPV projects that would contribute more gains for shareholders than stocks, which have been struggling for momentum.   The only reason to invest in a company like GE these days is for the dividend cash flow, rather than the company's earnings and future growth prospects. That seems sad to me. But, hey, what do I know? Ignoring taxes, a share repurchase has exactly the same effect on the company and the shareholders' wealth as a cash dividend. In either case, the company is disbursing cash to its shareholders; in the former, in exchange for shares which shareholders happen to be selling on the market at the time; in the latter, equally to all shareholders. For those shareholders who do not happen to be selling their shares, a share repurchase by a company is equivalent to a shareholder's reinvestment of a cash dividend in additional shares of the same company.  The only difference is the total number of shares left outstanding.  Your shares after a share buyback represent ownership of a greater fraction of the company, since in effect the company is buying out other shareholders on your behalf. Theoretically, a share buyback leaves the price of the stock unchanged, whereas a cash dividend tends to reduce the price of the stock by exactly the amount of the dividend, (notwithstanding underlying earnings.)  This is because a share buyback concentrates your ownership in the company, but at the same time, the company as a whole is devalued by the exact amount of cash disbursed to buy back shares. Taxwise, a share buyback generally allows you to treat your share of the company's profits as capital gains---and quite possibly defer taxes on it as long as you own the stock.  You usually have to pay taxes on dividends at the time they are paid.  However, dividends are sometimes seen as instilling discipline in management, because it's a very public and obvious sign of distress for a company to cut its dividend, whereas a share repurchase plan can often be quietly withdrawn without drawing that much attention. A third alternative to a dividend or a share repurchase is for the company to find profitable projects to reinvest its earnings in, and attempt to grow the company as a whole (in the hopes of even greater earnings in the future) rather than distribute current earnings back to shareholders.  (A company may alse use its earnings to pay down or repurchase debt, as well.) As to your second question, the SEC has certain rules that regulate the timing and price of share repurchases on the open market. "The Investment Entertainment Pricing Theory (INEPT) has this bit to note: The returns of small growth stocks are ridiculously low—just 2.18   percent per year since 1927 (versus 17.47 percent for small value,   10.06 percent for large growth, and 13.99 percent for large value). Where the S & P 500 would be a blend of large-cap growth and value so does that meet your ""beat the market over the long term"" as 1927-1999 would be long for most people." "You are overlooking the fact that it is not only supply & demand from investors that determines the share price:  The company itself can buy and sell its own shares. If company X is profitable over the long haul but pays 0 dividends then either Option (2) is pretty ridiculous, so (1) will hold except in an extreme ""man bites dog"" kind of fluke. This is connected with the well-known ""dividend paradox"", which I discussed already in another answer." You simply add the dividend to the stock price when calculating its annual return. So for year one, instead of  it would be It looks like you need a lot more education on the subject. I suggest you pick up a book on investing and portfolio management to get a first idea. Dividend yields are currently way below 5% on blue chips. Unlike coupons from fixed income instruments (which, in the same risk category, pay a lot less), dividend yields are not guaranteed and neither is the invested principal amount.  In either case, your calculation is far away from reality.  Sure, there are investments (such as the mentioned direct investments in companies or housings in emerging economies) that can potentially earn you two digit percentage returns. Just remember: risk always goes both ways. A higher earning potential means higher loss potential. Also, a direct investment is a lot less liquid than an investment on a publicly quoted high turnover market place. If you suddenly need money, you really don't want to be pressed to sell real estate in an emerging market (keyword: bid ask spread). My advice: the money that you can set aside for the long term (10 years plus), invest it in stock ETFs, globally. Everything else should be invested in bond funds or even deposits, depending on when you will need the access. As others have pointed out, consider getting professional advice.