Passive index investors tend to hold demonstrably-wrong beliefs less-often than DGIs.
Agree on less often, you definitely don't have as many indexers that are in the "know enough to be a danger to themselves" group as compared to dividend focused investors
But buying and holding index fund while being agnostic to underlying economics can lead to having 30%+ of your holdings in extremely overpriced technology firms that don't have real earnings - although that maybe only occurs every 20 or 30 years. At year end 1999, your top 12 market cap companies (which would be about 30% of a total US market fund at the time) had a weighted average PE of 78:
http://fortboise.org/top100mktcap.htmlSure, it might be a long time before that happens again, but insanity sometimes goes on for a lot longer than it should
In an article meant to defend Yield-on-Cost, he instead demonstrates how YOC has made him bamboozle himself. It has made him believe that a 2.75% dividend yield generates less income than a 2.64% or 2.57% dividend yield!
This is a perfect demonstration of what I always say when fighting against the misconceptions that drive dividend-focused strategies: in the end, a well-executed dividend-focused strategy probably isn't all that bad, but the misconceptions that one must hold in order for a DG strategy to seem logical bring with them a high risk that you will execute your strategy poorly.
I agree, in this instance the guy doesn't seem to understand opportunity cost of capital (what he should have done if he's truly only investing for yield is to subtract deferred taxes from his existing investments and then calculate if it's worth it to switch), and he doesn't talk anything about future expected cash flow/business prospects. He doesn't realize that total return is the metric that matters as an investor. I agree it's important that if you are going to consciously invest in only dividend paying companies to not use dividend growth and yield as your only considerations.
For me, when I hear DGI, I mostly think of value investing. Of course, an increasing dividend is no different than anything else you would use as a stock screen and should be the beginning of your research, not the end. The fact that a company pays a dividend is most likely a sign that it is a more mature and established firm. That it can grow its dividend consistently is a sign that its earnings and free cash flow is improving (unless if the payout ratio is being jacked up). That the Company must pay the dividend also keeps management honest and focused on executive decisions that lead to generation of cash instead of accrual earnings (an extreme example would be Enron's MTM tricks). Paying a dividend also forces management to employ best use decision making when allocating capital. There's less chance of management going out and overspending on empire building. You could, of course, argue that sometimes this results in a marvelous result (such as Philip Morris's acquisition of Kraft Foods, or Pepsi's investments into the properties that make up Yum), but it also avoids situations like Coke (and later Sony) buying Columbia pictures, or Quaker and Snapple, or Mondelez overpaying for Cadbury, ebay and skype, etc.
All in all, I think besides the focus on dividends, there's major disdain in this forum for people who pick stocks and thus deviate from market cap allocation. I think it goes back to the question you pose sky: do you think the market does the best job of allocating your capital. If the answer is yes or you don't know and think anyone who claims they do is wrong, then index. If you disagree, then you will always have a conflict with most of the posters on this forum. Nothing wrong with that, just a different cult of ideas on investing.