I am also a fan of the M* dividend newsletter, after a few dumb investments early on, I think Josh has really redeemed himself. Overall I am impressed that a 200K portfolio that started in 2005 and 2006 is up 20% with superior performance and lower volatility than the S&P especially during 2008 (losing 24% vs 37% for the S&P)
I have about 40% of my portfolio in dividend stocks 15% in bonds, 30% in index funds and healthy chunk of Berkshire and couple other random stocks.
A significant chunk of the M* Dividend newsletter are master limited partnerships in the energy sector, they don't seem highly correlated with domestic large caps, and in fact seemed to behave more like bonds in this last year. Same story with REITs. He also has a couple of foreign dividend stocks Diageo and UK utility National Grid. Still you are right there are a lot of dividend payers are large cap companies in slow growth business.
However, I don't see a real problem if your individual dividend issues are big cap, increase your AA of small and mid cap ETF, or reduced or eliminate your S&P funds. Even following Josh advice pretty regularly my overall porftfolio is pretty balanced other than overweight in the energy sectors (and formerly finance
) and less foreign stocks than seems to be popular.
Finally, I should add that to me the benefits of a dividend approach vs total return are much larger during retirement than during the accumulation phase. In the accumulation phase I am living off of my paycheck. So there isn't a obvious place to spend the dividends you get. In retirement, first of all I have more time to research individual stocks (it is my new job) and secondly the dividend are my paycheck!.