The key to dominating a niche is to create your own competition. So I would have to say making multiple sites is probably the best way to choke out all competition.
I would say it depends if you really really care about the topic of the site. If I were doing a niche site on sump pumps, then I wouldn't bother making some huge site about it and making it my baby. I only care about that niche making money rather than getting recognition from it (DruSam the sump pump Guru! yeah right...).
If I had a huge site on something more popular like the Ultimate iPod Resource Supreme site. I would make that my baby and grow it, coddle it and get recognition from it. Not spread out the niche on a bunch of little sites.