Just because a company pays dividends, doesn't mean that it cannot deliver total returns. The stocks I own pay up to 50% of earnings in dividends and reinvest the rest in the business. In addition to that I have found that dividend stocks have managed to outperform non-dividend paying stocks over the past 30 years.
For example companies I mentioned earlier in my first post have managed to not only grow business for extended periods of time, but also to pay higher dividends ( high dividend payment, not high dividend yields) as well. All the while these stocks have delivered solid total returns as well.
WalMart ,McDonalds , Coca Cola etc, are all household names and just a small sample of what I am talking about. There are only about 300 companies in the world which have raised dividends for over a decade, which makes it easy to start a manageable list of stocks to watch. Add in a few other criteria ( valuation, minimum yield,) and the list drops to less than 100.
I generally think that if a company can reinvest all of its earnings back in the business, and keep its return on equity that should be fine. But realistically, companies that reinvest all the money they have back in the business without paying a dividend do this because they cannot afford to pay a dividend. In other words in most cases, not paying a dividend is because the company has weak fundamentals. Exceptions such as Berkshire Hathaway are just outliers, not the norm.
Also, if a company cuts dividends I sell it, and reinvest the proceeds in other stocks. If earnings are low, but the company maintains distributions, then management is expecting earnings to improve soon. http://www.dividendgrowthinvestor.com/2009/01/dividend-cuts-worst-nightmare-for.html
In a diversified portfolio of 40 stocks you could get one or two cuts per year. Below is my portfolio as of April:
Oh yeah, Eric, I mentioned that I purchase stocks that increase earnings, and that increase dividends. Hence your Case 2 is not relevant. If a company does cut the dividend, and reinstates or starts raising it in a few years, I would check to see if its fundamentals can support more dividend increases. Dividend cuts are seen on case by casee basis.
Last but not least, dividends are better than relying exclusively on total returns, because dividend payment as a component of total return is more stable than price alone. In other words a diversified portfolio of stocks could generate 10% annual total return, but that could be several years of negative total returns followed by one year of spectacular returns. You need to eat during all those years. Dividends are more stable, they don't get cut that often in a diversified portfolio:
So dividends are more reliable and thus are better suited for would be retirees.( or retirees)