There are many criteria that investors look at when selecting dividend stocks for their portfolios. Factors like P/E ratio, the moat of a firm, earnings growth, payout ratio, and dividend growth are all very important when determining whether or not to invest in a particular company. However, there is one factor that I believe is especially important for dividend stocks, and it is often overlooked by investors. This factor is the short interest of a stock.
The short interest of a stock is an important issue to consider when selecting an investment because it indicates the existence of an additional pool of buyers, short-sellers, who could be forced to cover their short positions if the stock goes up and they begin to lose money on these positions. This effect can easily lead to a short squeeze, where a number of short-sellers looking to cover their positions are forced to bid the stock up higher and higher in order to do so.
This strategy of searching for high-quality dividend growth stocks with a high short interest is especially effective since shorting this type of stocks is a risky and expensive proposition. It is risky since the price of these stocks tend to have only short-lived decreases, as constantly increasing dividends and earnings will eventually force the stock on a long-term upward trajectory. It is expensive since any short seller must generally pay interest on the shares that he has borrowed as well as the dividend of the stock to the person that he has borrowed the shares from. For dividend growth stocks with yields of 3% or higher, this proposition becomes very expensive, very quickly. For both of these reasons, it seems reasonable that short sellers will be hesitant to hold their short positions on high-quality dividend growth stocks for very long, leading to increased chances of a short squeeze. Although most stocks in this category have a low short interest of around 1%, there are some surprising examples with a short interest of 5% or higher.
The following are three examples of high-quality dividend growth stocks with a short interest of over 5% that are ready for a short squeeze and will pay you handsomely while you wait: Johnson and Johnson (JNJ), Waste Management Inc (WM), and Dr Pepper Snapple Group, Inc (DPS).
Johnson and Johnson - This is the world's leading and most diverse health-care company. It is diversified into three divisions: pharmaceutical, medical devices and consumer products. According to data from Finviz.com, its current dividend yield is 3.51%, its forward P/E ratio is 12.7, and its current short interest is a whopping 8.07%. According to data from Morningstar, its 5 year dividend growth rate is 9.1%.
Waste Management Inc - This is largest waste services provider in the U.S., owning nearly 300 landfills and a number of waste-to-energy plants producing renewable energy. According to data from Finviz.com, its current dividend yield is 4.11%, its forward P/E ratio is 14.5, and its current short interest is 5.64%. According to data from Morningstar, its 5 year dividend growth rate is 7.2%.
Dr Pepper Snapple Group, Inc - This company produces non-alcoholic beverages in North America. It owns many popular brands, such as Dr. Pepper, Snapple, 7UP, Canada Dry, and Hawaiian Punch. According to data from Finviz.com, its current dividend yield is 2.98%, its forward P/E ratio is 14.2, and its current short interest is 5.35%. According to data from Morningstar, it only started paying dividends in 2009, but dividend growth was 34% between 2010 and 2011 and the dividend for 2012 was already increased ahead of schedule.