First, let me say that, traditionally, looking at stocks with a low P/E yield with a high dividend yield traditionally returns a bit higher than the market.  Stock studies done by Eric Lufkin and David Dreman seem to bear this out with small-cap, mid-cap, and  high-cap stocks traded on the NYSE.  The disparities between the various market sizes is almost negligible, with small-caps I believe returning a bit more but having a more inherent risk of the study being corrupted due to the effects of "survivorship bias" (where the stocks that managed to stay in the study for the required time period being the ones that "survived" the risk of being a small cap and were thus biased to be a stellar performer).

The problem I have with dividend yield investing exclusively is that it opens you up to certain problems.  Companies rationally should pay a dividend when they cannot earn a return a return equal to the dollars reinvested back in the company itself.  For every dollar reinvested there should be a dollar returned.  Otherwise they should distribute the money back to shareholders to let them seek returns elsewhere.  Now companies that are at this point where it makes sense to distribute dividends are usually mature, stable companies, in mature stable industries.  Manufacturing companies are an example, like Big Auto, or utilites, and mining companies, or railroads.  This has led investors to associate a measure of safety with dividend companies.  So, dividend yields usually lead to higher share prices.  Knowing this, some managements in dire financial situations with a "long tail exposure" (an insurance term which means that you might have a long time before the chickens come home to roost) might be tempted to boost their dividend yields so they can cause a spike in their market price as "safety" investors rush in.  At this point the management usually seeks  to unload their personal shares, use their new size to secure easy credit, or basically leave the individual investors holding the bag when things collapse (El Paso being a good example).   The market makes companies pay a stiff price in terms of market cap depreciation for companies that  suspend or reduce their dividend.

The other problem comes from the nemesis of investors everywhere; inflation.  Dividends are paid out from earnings.  In companies with high capital requirements (the same ones that typically pay out high dividends) in an inflationary environment ever increasing amounts of real dollars must be shelled out just to keep up.  Like the Red Queen in Alice in Wonderland, the company works harder and harder just to stand still.  These are not the companies you want to be in during hard inflation.  Thankfully, the dividend offers protection since the investor gets a portion of earnings with which to seek higher returns on lower capital requirements elsewhere, but it is cold comfort.  The rational investor would be better served finding a low cost of capital investment.

Finally, the big issue I have with high dividend companies is that it is a sign that management is operating in a business with low growth prospects.  The dividend is nice, but it is taxable as income, so not as ideal as gains, which are taxed at a lower rate.  So, from a pure mathematical sense the rational investor should seek growth over dividends.  The issue is the risk involved with that growth.

Update: after reading through this one day after I wrote it I realize that this makes me sound extremely negative on dividends.  I'm not.  I just don't think that investors should be lulled into thinking that dividends = safety or rationality of management.  Like all things capital allocation is something that is enormously complex but should at all times be rational.  Dividend distributions can be extremely beneficial to individual shareholders or they can be harmful, depending on the management and company doing the distribution.

Also, another thing which I forgot to take into account was the drop in dividend taxation that goes into effect this year.  That obviously makes a stronger case for dividends.  Corporate taxation of dividends has been low for quite some time so corporations have always favored having holdings in dividend paying companies.

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