If I am not mistaken the 2001 Yamaha Diversion has a clutch cable and does not have a hydraulic self adjusting clutch mechanism.
This was my son's first motorcycle and we experienced similar issues with his. I will say that this model is bullet proof. Especially the 8 valve air cooled version which you have.
Throw Out Bearing
If your throw out bearing is trashed then your throw out bearing washer probably is too. This will take up a lot of adjustment so you can take that rack gear that's in there and skip a tooth on it so the clutch engagement arm is properly positioned on your clutch cover to have the maximum throw when you pull in the clutch lever. If you have dissassembled this component you should know exactly what I am talking about.
Your pressure plate where the throw out bearing washer goes, is made of aluminum. If you don't have the washer and the throw out bearing operates against that aluminum it will eat into the pressure plate quickly and ruin it. If that has happened, get a new one. It's done. If it hasn't happened, make sure you assemble in the right order and have that nice steel washer against it to protect it. This has been the source of a grinding sound when I have seen a failed throw out bearing on this model. Of course, I can't be sure if that's the case with you.
note:the XJS models suffer from a clutch basket noise issue as well. For some, they describe it as grinding, for others, they describe it as clanging. This is the sound of the clutch basket shock springs rattling in the clutch basket. You DO NOT NEED to replace the outer basket if this is the noise. It sounds miserable but it's fine. The springs will not come out of the basket. Suzuki models from 1982 to 2005 have this issue. Almost all of them. It's ridiculous, it's annoying but it's not a disaster and it's not unsafe. It just is
First, the handle for the clutch on the handlebar always squeaks. He bought two
lever landings before he finally took my advice and used a graphite dry lubricant on it. It comes in a spray can and has a liquid carrier that evaporates rather quickly leaving behind the graphite. Any excess can wiped off afterward. Apply liberally.
2nd, use the graphite to lubricate the cable inside the housing. It's super messy if you do it wrong. It's super messy if you do it right. Take the cable off the lever before doing this so you can get the lubricant inside of the cable housing. DO NOT ever use an oil based product to lubricate your cables. It will get stiff over time, especially in cold weather as the hydrocarbons evaporate slowly from the oil. It will get gummier and stiffer until it's unbearable.
On the handlebar
Adjusting a clutch cable on a motorcycle is an art form. You need to take your time and move the handlebars to the far right and left stops and check your adjustment each time. You want to have a little play in the lever. When you turn your handlebars far right on that model it WILL take up some of the play. You will need to adjust accordingly. When the handlebars are pointed straight there should be play in the clutch lever. It might seem a bit wonky but it's correct. Of course, you will want to keep the play to a minimum. Hence the art form. Find balance.
At the clutch cover
Perhaps I should have put this above but what are doing is adjusting the clutch at the point where it joins your clutch cover with the adjustment and locking bolt. Be sure you have the second bolt to lock down the primary in order to keep your adjustment from changing. You will want to adjust here and at the handlebar. You want the clutch adjustment screw at the handlebar to be about halfway in the landing, you find the point by adjusting at the clutch cover, then you fine tune the adjustment up top.
You should have a big mess of graphite down here because you did such a great job of getting the liquid graphite into the cable. If you don't have a big mess, you did it wrong. Wash, rinse, repeat. You cannot have enough dry graphite in the cable housing.
If you replace the the throw out bearing and the washer, lubricate properly and then take your time adjusting the clutch with a warm motor, I believe your drag issue will go away. It's painful and manual but it's a beautiful analogue motorcycle that requires you to love on it. It's old school cool and that's rare nowadays.
Here is a clutch diagram for your bike.
Enjoy that thing, it will love you back for a long time.