Bernstein described the function well in the four pillars.
"Good" stocks tend to have their day, then eventually stop being king of the hill and slide. There are clearly exceptions, but on the whole, the hot companies of this decade are probably not the hot companies of a decade or two ago. Its also hard to figure out which stocks are going to become "good" stocks, and once they're obviously good, most of their upside has already been realized.
"Bad" or value stocks have more upside, since its more likely that they'll "get better" eventually. In the meanwhile, they often pay a good dividend to make it worth your while to wait it out. Its easy to spot a bad company thats not that bad. Look...there they are!
Buy buying a fund or basket of "bad" stocks, you improve the odds of picking up the value premium and lower the odds of defaults.
I dont as a rule buy into investments looking purely at the dividend, but I do very much like ones that pay a good dividend, have good prospects to give me an extra 2-4% of capital appreciation a year, low default rate and reasonable volatility. Given the tax treatment offered on qualified dividends is the closest thing to a free lunch, I'll take 'em.
Zathras - I had the same conversation with the guy a dozen times, he doesnt get it. While technically a dividend causes the market computers to mark down an equity or fund, the subsequent bid/ask market action usually wipes away most of that adjustment.
Its not the same to say that you can sell shares instead of take the dividend. I can take the dividend from a stock thats taken a double digit hit to its share value without losing the share in a depreciated state and maintain the share holding until the price recovers.
Thats the beauty of the construction i'm using. Volatility is irrelevant. Unless there is a mass of defaults or a whole bunch of companies stop paying on their stock dividends and bond payments...not much to worry about.
In the event that such a horrid event should come about, I think I may buy a couple of gold bars. In the event of disaster, I'm going to hammer one into a shotgun and the other into a pot roast. I may get a third one to use for a door stopper.