In theVWD 2005 Express Guided Tour, section "Implementing SQL Server 7/2000 Dependency Caching", the instructions are to use VaryByParam="none" in the OutputCache directive, but I could not get the data update to work unless this was set to VaryByParam="*".
Then 2 windows are required to see dependency caching, one to watch for dependency caching, the other to change the data (and see the cache change when the parameter changes).