But in any case, I don't want to get in too deep, because this problem has been studied by researchers for over 60 years under such names as "The Dividend Dilemma" and "The Dividend Irrelevance Theorem"; and so far, no real answer for why investors like dividends has been discovered. But when I suggest this issue to other investors, they all have the same argument: dividend-paying stocks return more than non-dividend paying stocks. Usually this is based on their review of how the Nasdaq (lower dividend yields) returned less than the Dow (higher dividend yields) over the past 10 years or so. There are numerous reasons this happened that are beyond the scope of this article, namely:

1. Nasdaq has smaller cap companies, which increases the risk and capitalization/discount rate for valuation formulas.

2. Nasdaq companies have more volatile earnings and higher costs of capital, which increase the capitalization/discount rate.

3. In the long-run the Nasdaq has returned more; but the arguer does not go far enough back.

4. The market has been dismal over the past 10 years; the fundamentals of Nasdaq companies are riskier and more volatile; therefore, the Nasdaq dropped more than the Dow

5. Dow and Nasdaq companies are apples and oranges.

As you see, none of these conclusions even consider the dividend. That's because the dividend is irrelevant to the company's value in the absence of transaction costs: cash is being pulled out of the company and placed in the investor's brokerage account; so, not taking into account the costs listed in items 1-6 below, the investor's personal wealth is the same whether he had received the dividend or not! The value of a company is derived from the income it produces (not the dividend). And in the case where a dividend is paid, the dividend actually reduces the value of the company. The reasons for this are as follows:

1. The investor must pay taxes on those dividends, which hurts his return.

2. The company cannot invest in other activities because it handed its capital back to its investors.

3. The investor must make a decision what to do with the dividend (when he entrusted his money with the company's management to invest for him in the first place!).

4. When he invests the dividend, he must pay commissions and other transaction costs. He also runs the risk of a lower return than if it had been left in the company.

5. The company has to pay a Registrar to handle the logistics of the dividend, which cuts into the investor's returns.

6. If the company is short on cash flow, they may still have an incentive to pay the dividend to appease investors and put itself in a liquidity glut.

What is interesting about all this is that most investors don't realize these ill effects that dividends produce. Here is why: they don't see all those 6 costs reduced from their dividend. If it were the case where the dividend landed in their brokerage account in an amount net of the taxes, the opportunity cost of keeping the money in the company, the commissions, the cost of the registrar, and the higher interest rates for having smaller liquidity ratios, these dividends would not be as appealing to the uninformed.

Further, what you will find in these textbooks (and from all sorts of pundits and analysts) is that there is such thing as a risk free rate. What is this risk free rate! There is no such thing as a risk free investment, period; it just doesn't exist.

Most people want to characterize t-bills as the risk-free rate; however, just off the top of my head, I can think of all kinds of risks you have with t-bills: namely, you have interest rate risk, default risk (yeah yeah, "full faith and credit…" blah blah blah), risk that the currency will be debased and you will actually have a negative return, just to name a few. Does that put a kink in your knowledge of finance?

Personally, I find treasuries (and anything to do with bonds inherently risky); number one, you're taxed on the interest at ordinary rates (that's an immediate 15-35% loss). Second, your ultimate return is controlled by forces you have no control over, namely the Federal Reserve. Now we are getting somewhere.

Investing in stocks allows you to read financial statements of your investees, vote on pertinent matters, and obtain relevant information related to your investment decisions. In contrast, for purposes of bonds, how many times have you been able to listen in on the FOMC Meeting? How many times have you been able to vote on interest rate changes? This gets me to my point:

All investments have two kinds of risks: inherent risks and control risks. Inherent risks relate to those that are going to be there no matter what. Control risks are the risks that you can't control with your own actions. In short, you can control a company; but you can't control the Federal Reserve. Why would anyone invest in bonds? Beats me.

But anyway, what I'm trying to get at here is that risk is not a function of volatility; it's a function of how accurate you think you are and how well you can control your risks. If you are 100% sure your investment is going to return a certain amount (and you can make sure of that), by all means it's a risk-free investment.

And if you are 100% sure that this investment is the best, why the hell would you diversify?! What burns me up more than anything is the notion that you should diversify, and that people actually recommend percentages of asset classes to do so! How retarded is that? It's proven backwards, forwards, and sideways that stocks outperform every other asset class. Why anyone would dilute their return by diversifying is beyond me.

So, in short, there are times when your return is going to outweigh your non-controllable risk; and during those times, you go all in. If the count is 3-0, the bases are loaded, and you're up to bat, you should rare back and hit the ball as hard as you possibly can, because you're likely to get one right down the pipe! But how do you know when the count is 3-0? I suppose we'll save that one for another day.

What typically happens when interest rates are too high? All it means is that there is not enough money to lend for the amount of money demanded; so, the only way to decrease interest rates is to either increase money supply or decrease money demand. What you find is that companies begin losing money, because money demand decreases and hence demand for their products. Earnings are released, investors start pulling their money out of equities, and the market tanks. You would think the best play here is to buy bonds, after all, interest rates are high, right? Not so.

There are two ways to win at investing: be first or be smart. We will use both of these. Taking a smart and logical approach here, typically:

High interest rates => Money pulled out of equities => Equity prices undervalued

"That sounds well and good," you say. "But what about the interest rates being high (our cost of capital)? How do we know that the assets are undervalued enough to overcome the high interest rates?"

Well, I'll tell you: margin interest rates are variable; lines of credit are variable. It's genius, really. In order for people to invest (and borrow money), interest rates will have to come down. This is usually helped by the Fed who will print more money, which reduces interest rates even more. What you will find is that you purchased equities near the bottom, the interest rate decreased as equities rose, and your cost of capital diminished as your capital skyrocketed. Soon enough, your Debt/Equity ratio is de minimus as the value of your Assets Under Management increase, and the higher interest rates in the next business cycle have an immaterial effect on your profitability.

Such a contrarian approach is likely to yield the investor excess returns as he takes on more and less risk at the most opportune times.