Component used:
- androidx.navigation:navigation-fragment-ktx:2.2.1
- androidx.navigation:navigation-ui-ktx:2.2.1
Version used:
Devices/Android versions reproduced on: Cannot compile

STEPS:

Create a DialogFragment class called MyDialog
Now create another class called MyNewDialog that inherits from MyDialog instead of DialogFragment(for example, to inherit styles or UI)

Now in a XML graph, try to add it and put it some arguments:

<dialog
    android:id="@+id/my_new_dialog"
    android:name="com.example.app.dialogs.MyNewDialog"
    tools:layout="@layout/my_dialog">

    <argument
        android:name="argument_1"
        app:argType="string"/>

    <action
        android:id="@+id/action_1"
        app:destination="@id/destination_1" />

</dialog>

Then, when trying to build the application, it won't compile and the navigation generated code will throw:

This function must return a value of type MyNewDialogArgs

However, no problem with actions (Why it doesn't throw same error with type MyNewDialogDirections??)

No problem if we use MyDialog(that inherits directly from DialogFragment) instead of MyNewDialog(that inherits from MyDialogand this last, from DialogFragment