5 Dividend Stocks Short Sellers Are Targeting

Includes: FTR, PBI, RRD, VLY, WIN
by: Insider Monkey

By Matt Doiron

There are a number of things that income investors have to watch out for when browsing high-yield stocks. For one, even stocks paying high yields can receive high short interest, including if a number of market players believe that the company will cut its dividend soon and expect the stock price to fall considerably following that event (as often occurs when high-yield stocks reduce dividend payments). Using data from Fidelity, here are five stocks with market capitalizations of at least $2 billion, dividend yields of at least 4% at current prices and dividend levels, and at least 10% of the outstanding shares held short as of the most recent data:

Leading our list is $5.1 billion market cap telecommunications company Windstream (NASDAQ:WIN). The company has made quarterly dividend payments of 25 cents per share since late 2006 - including through the financial crisis and recession - but revenue and earnings have been down contributing to a high payout ratio. At present the dividend yield is over 10%, but the stock price is down 16% in the last year against a rising market and short sellers continue to circle the company.

We maintain a database of quarterly 13F filings from hundreds of hedge funds in support of our work developing investment strategies. We have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small cap strategy); our own portfolio based on this strategy has outperformed the market by 33 percentage points in the last 11 months. We can see from our database that billionaire David Shaw's hedge fund D.E. Shaw owned 1.5 million shares of Windstream as of the end of March (find D.E. Shaw's favorite stocks).

Another high-yield telecom stock which short sellers have taken considerable interest in is Frontier Communications (NYSE:FTR). Frontier used to make quarterly payments of 25 cents per share, just like Windstream, but since 2012 the dividend has been reduced to 10 cents. This is still an annual yield of about 9%, but the payout ratio is high and 24% of the float is held short as many bears anticipate future dividend cuts. Wall Street analysts expect the company to earn 22 cents per share both this year and next year, which would obviously be less than Frontier's dividend commitments; in addition, revenue has been down.

R.R. Donnelley (NASDAQ:RRD), a $3.4 billion market cap business communications and marketing company, also satisfies our criteria with a dividend yield of 5.5% and more than 20% of the outstanding shares accounted for by short sellers. It is another company which has consistently made the same dividend payment each quarter for several years. Even with business struggling recently, the stock has doubled year to date as the decline has been weaker than previously expected. Tiger Global Management, which was co-founded by billionaire Chase Coleman, had 3.5 million shares in its portfolio according to its most recent 13F (see Tiger Global's stock picks).

Short sellers have also been excited about mail services company Pitney Bowes (NYSE:PBI), selling 30% of the total shares outstanding. Pitney Bowes has been another strong performer year to date, up 63% since the beginning of 2013 following an earnings beat for Q2 (although the company's sales were down 7% versus a year earlier). The dividend yield here is 4.3%. Investors should be skeptical of a company specializing in mail services given the changing economic landscape, and as with many of the other companies on this list a considerable portion of net income is going into paying the dividend.

Rounding out our list of high yield names with high short interest is Valley National Bancorp (NYSE:VLY), a regional bank serving New York and New Jersey. Recent quarterly payments for the company have been 16.3 cents per share, which implies an annual dividend yield of just over 6%. Revenue and profits were about flat last quarter compared to the second quarter of 2012, though analysts expect business to get weaker next year and so the forward earnings multiple rises to 17. Given the already high payout ratio, lower earnings could indeed threaten Valley National's dividend.

Disclosure: I am long FTR.

Business relationship disclosure: This article is written by Insider Monkey's writer, Matt Doiron, and edited by Meena Krishnamsetty. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.