trading/investing in commodities - why do/have people prefer equities?

[iversonian]

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Commodities don't earn dividends, i.e., when you're holding it, it's just sitting there not doing anything.

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Not exactly true. You only need to put up a few percent margin to purchase a commodity futures contract. The rest can be invested in interest-bearing instruments. (T-bills being the instrument of choice for most futures traders.) The interest income can be thought of as a type of dividend.

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You can't count the margin that's held in treasures to be part of the return that commodities return. That's like saying if you're at the 0% house edge blackjack table and the casino asks you to post $10k to be extended $20k in credit, that you're playing a +EV game as long as the casino sweeps the $10k into treasuries on your behalf. You're foregoing the interest on the $10k by posting it for the duration of your play time, so you can't take credit for that as part of the returns on investing in commodities.

To give another example, suppose I enter into a $20k futures contract with you. We both find someone willing to guarantee our respective ends of the contract with a deposit of $10k (and with no fees charged). At the settlement date, the spot is identical to the futures price, and we made $500 each on our deposit. It would be wrong to attribute any of that return to the commodity. The futures contract will pay off what it will pay off, and the interest on the deposit will be what it will be. If anything, being forced to post a deposit should be considered a cost of entering into the contract since it restricted our freedom of choice.