Short interest refers to shares that are sold short but have not yet been repurchased and replaced (covered). The person selling short typically feels that share prices will drop or underperform. A stock with a higher percentage of shares sold short reveals a negative sentiment. Why should you care? These next 2 charts show the impact that short interest may have on your holdings.
50 Highest Short Interest Stocks in the S&P 500 - Rebalanced Monthly
50 Lowest Short Interest Stocks in the S&P 500 - Rebalanced Monthly
Over the past 10 years there has been a spread of 6.28% between the highest and the lowest short interest stocks in the S&P 500 (NYSEARCA:SPY). Stocks with the highest short interest fell 31% farther down than stocks with low short interest.
Short interest on its own is fairly impressive, but there is one major compelling reason why many investors should stand up and take notice of short interest. The reason is that this effect is even more pronounced in high dividend yield stocks.
High Yield Dividends and Short Interest
It is often hard to know whether a high yield dividend stock is a value trap or a good bargain. One quick and prudent measurement of a high yield stock would be the short interest percentage based on total outstanding shares - although some prefer basing it on the available float.
This next set of charts only draws from the highest dividend yielding quarter (125 stocks) of the S&P 500. From there we hold the 20 highest short interest stocks and the 20 lowest short interest stocks.
20 Highest Short Interest of High Yielding Stocks in the S&P 500 - Rebalanced Monthly
20 Lowest Short Interest of High Yielding Stocks in the S&P 500 - Rebalanced Monthly
Now we see an average annual return spread of more than 9% and the high short interest segment fell more than 33% farther down.
Stocks to Consider Buying
If you are considering stocks with low short interest and a decent dividend yield, here are a few to investigate further. Short interest is based on total outstanding shares.
- Verizon (NYSE:VZ) has a 4.83% dividend yield and 0.92% short interest
- Philip Morris International (NYSE:PM) has a 4.66% dividend yield and 0.88% short interest
- Duke Energy (NYSE:DUK) has a 4.63% dividend yield and 1.34% short interest
- Exxon Mobil Corp (NYSE:XOM) has a 3.52% dividend yield and 1.30% short interest
- Coca-Cola (NYSE:KO) has a 3.4% dividend yield and 0.76% short interest
- McDonald's (NYSE:MCD) has a 3.15% dividend yield and 1.42% short interest
Stocks to Avoid
Well, I shouldn't say that you must avoid these. But definitely do your due diligence as to why these are highly shorted stocks. And think about past performance of such stocks.
- Seagate Technology (NASDAQ:STX) has a 6.42% dividend yield and 12.6% short interest
- Caterpillar (NYSE:CAT) has a 3.32% dividend yield and 7.29% short interest
- CenturyLink (NYSE:CTL) has a 8.9% dividend yield and 10.75% short interest
- Helmerich & Payne (NYSE:HP) has a 4.17% dividend yield and 23.8% short interest
- Frontier Communications (NYSE:FTR) has a 12.5% dividend yield and 19.78% short interest
Of course, this is just the starting point. You will want to find out why investors are heavily shorting these high dividend yield stocks. For example, Frontier's negative earnings might give you reason to pause and think about the high possibility of a dividend cut. Or Caterpillar's 287.84% payout ratio might make you think twice before climbing aboard.
Regardless of whether you buy a stock with a high or low amount of short interest, it is definitely a sentiment indicator that is worth checking into before investing.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.