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We like high dividend stocks and consider them as great alternatives to 10-year Treasury bonds. Like Jim Rogers, we are concerned about the Fed’s inflationary monetary policy and want to protect ourselves against inflation. One of the ways of doing this without assuming significant risks is investing in high dividend stocks.

High dividend stocks are usually safer but under some circumstances they might be extremely dangerous. Vulnerable high dividend yielding companies may be targeted by short sellers. So high short interest in high dividend stocks may signal danger.

We compiled the list of stocks that have at least a 5% dividend yield and a minimum of 5% open short interest (data is sourced from Fidelity). We also require that the short interest has been increasing compared to the previous month. These stocks may be substantially riskier than other high dividend yielding stocks:

Company Name

Symbol

Dividend Yield

2011 Return

AMERICAN CAPITAL AGENCY

AGNC

19.4

10.1%

HATTERAS FINANCIAL CORP

HTS

14.5

-1.6%

FRONTIER COMMUNICATIONS

FTR

9.5

-14.4%

VECTOR GROUP LTD

VGR

8.9

6.8%

FRONTLINE LTD

FRO

8.0

-41.3%

OMEGA HEALTHCARE INVESTORS

OHI

7.4

-4.8%

REGAL ENTERTAINMENT GROUP

RGC

7.1

6.9%

MEDICAL PROPERTIES TRUST

MPW

7.0

9.4%

NEW YORK COMMUNITY BANCORP

NYB

6.7

-19.5%

REDWOOD TRUST INC.

RWT

6.7

2.6%

NORDIC AMERICAN TANKER SHIPPING

NAT

6.4

-13.5%

HEALTHCARE REALTY TRUST INC

HR

5.9

-0.8%

POTLATCH CORP

PCH

5.8

11.8%

PARK NATIONAL CORP

PRK

5.8

-7.2%

HEALTH CARE REIT INC.

HCN

5.5

13.2%

DCT INDUSTRIAL TRUST INC

DCT

5.5

-1.5%

R.R. DONNELLEY & SONS CO

RRD

5.4

13.1%

INTEGRYS ENERGY GROUP INC

TEG

5.3

9.2%

REALTY INCOME CORP.

O

5.2

-0.3%

HCP INC

HCP

5.2

2.3%

VALLEY NATIONAL BANCORP

VLY

5.2

1.4%

LEXINGTON REALTY TRUST

LXP

5.1

17.5%

EASTGROUP PROPERTIES INC.

EGP

5.0

2.0%

High dividend stocks usually beat the market on the average. Unfortunately, these 23 stocks returned 0.1% since the end of 2010, including dividend payments. The S&P 500 index returned more than 4% during the same time frame. Fourteen of the 23 high dividend stocks on this list underperformed the market.

The companies on this list are mainly real estate trusts, financials, and shipping companies. Some of these companies are favored by prominent hedge fund managers. Brian Jackelow’s SAB Capital had more than $130 Million in AGNC at the end of March. AGNC was Jackelow’s largest position (See SAB Capital’s top three stock picks here). Jim Simons also had $10 Million in AGNC. Jim Simons also had nearly $20 Million in Frontier Communications (FTR) which is third in our list (See Jim Simons’ favorite stocks). The worst performing stock in this list is Frontline (FRO). Ken Brodkowitz’s Newland Capital had the largest position in FRO with a $16 Million investment at the end of March. Ken Brodkowitz used to work for Raj Rajaratnam. Brodkowitz also had nearly $22 Million in another high dividend yielding stock, R.R. Donnelley (Check out his top picks here).

Disclosure: I am long FTR.

Source: 23 High Dividend Stocks Being Targeted by Short Sellers