By Matt Doiron
Income investors like to look for stocks with high dividend yields, and a policy of returning cash to shareholders is considered a plus by many others in the investment community as well if a company has limited growth opportunities. Sometimes, however, interest from yield seekers can bid a stock price above fundamental value, attracting short sellers; for this and other reasons, we think that it can be wise for income investors to take note of apparently attractive companies with high short interest. Here are five stocks which feature daily dollar volume over $10 million and dividend yields of 4% or higher going by current prices and recent dividend levels, and which have high levels of short interest:
Frontier Communications (FTR) is an excellent example of what we are looking for; judging by recent dividend payments, the yield is close to 10%, yet 22% of the float is held short as many market players are sour on the $4 billion market cap voice, data, and video service company. In the fourth quarter of 2012, Frontier's revenue was down slightly versus a year earlier and this helped cause earnings to fall 41%, showing that the company is struggling somewhat. Phil Gross and Robert Atchinson's Adage Capital Management reported a position of almost 35 million shares at the end of the fourth quarter of 2012 (see Adage's stock picks).
One short target which recently increased its quarterly dividend payments is Digital Realty Trust (DLR), a real estate investment trust investing in technology-related property. Real estate investment trusts are required to distribute a large share of taxable income to shareholders in order to maintain their preferential tax treatment; at Digital Realty, this occurs in the form of a 4.2% dividend yield after the recent increase to quarterly payments of 78 cents per share. Unlike many REITs, Digital Realty has increased these payments since before the financial crisis. The most recent data shows that short sellers are responsible for 17% of the float.
Shorts are also getting aggressive with Windstream (WIN), which provides telecommunications and cloud computing related services. There is a very high yield here, at over 10%, though the stock price has fallen by more than double that figure in the last year, showing that investors cannot count on a positive total return from the stock. Even after that decline in price, Windstream is valued at 30 times its trailing earnings, and we'd generally be wary buying a stock at that premium pricing. Income investors might still consider it purely on the yield, but we'd only advise them to be aware of other factors as well.
Pitney Bowes (PBI) currently makes quarterly dividend payments of 37.5 cents per share, making for a dividend yield of about 10% at current prices. The $3.2 billion market cap mail and shipping equipment company had its net income fall 57% in its last quarterly report compared to the fourth quarter of 2011, and despite low earnings multiples, short sellers are piling in on the belief that electronic file sharing will devastate the business. Tiger Global Management was buying the stock between October and December, and closed 2012 with 1.8 million shares in its portfolio (check out more stocks Tiger Global was buying).
Another high-yield stock with a sizable short community is asset management firm Federated Investors (FII). The dividend yield here is 4.2%, with the company having made regular quarterly payments of 24 cents per share (and a couple of special dividend payments) since the end of 2008. Financial performance actually looks to have been decent, and the earnings multiples are not bad either, but there is clearly a bear case, given that 17% of the float is held short. Royce & Associates, managed by Chuck Royce, disclosed ownership of over 13 million shares at the beginning of January (find Royce's favorite stocks).