The Unloved High-Dividend Stocks: A Contrarian Perspective The Unloved High-Dividend Stocks: A Contrarian Perspective

Updated On: February 16, 2024 10:04 am

Amid the financial hubbub, a set of overlooked stocks offers dividends ranging from 6.9% to 21.4%. However, these hefty returns do not dominate our discussion today. What captured our attention is the unpopularity of these stocks among Wall Street experts, signifying significant potential for a bullish surge.

How is such a paradox possible? These shares are being heavily shorted. Short selling involves borrowing and selling shares with the expectation of purchasing them back at a lower price in the future. But what unfolds if the stock price surges instead?

This phenomenon, known as a “short squeeze,” can lead to a chain reaction of buybacks by short sellers, propelling the stock price upward. Notable historical instances of short squeezes, such as the surge in Volkswagen AG shares in ’08 and the GameStop saga, underscore the potential magnitude of these events.

As staunch contrarian investors, we steer clear of aligning with these pessimistic short sellers. Instead, we are drawn toward considering stock purchases in heavily shorted companies. However, contemplation merely initiates our meticulous process. The subsequent step involves discerning the pitfalls in the prevailing short-selling consensus, a journey that we are eager to embark on with these five high-dividend stocks.

Cracker Barrel Old Country Stores (CBRL)

In the case of Cracker Barrel Old Country Stores (CBRL), investors were advised to consider divesting last April, a move vindicated by a 25% decline in CBRL shares since then. Subsequent assessments have failed to unveil any rays of optimism, with CBRL remaining stagnant, juxtaposed against a double-digit market climb since September.

The Enigma of Short Interest

Although CBRL observed a decline in short interest following summer losses, a substantial increase was witnessed post a fourth-quarter earnings disappointment and a subsequent drop in foot traffic. However, potential exists for the remaining short positions to be squeezed out should several strategic initiatives, such as cost-cutting and a new rewards program, yield favorable results.

CVR Energy (CVI)

Texas-based CVR Energy (CVI), with a dividend yield of 12.8%, participates in renewable fuel, petroleum refining, and nitrogen fertilizer manufacturing through its subsidiary, CVR Partners LP (UAN). The uncertainty stemming from short interest grows as investors grapple with the aftermath of Carl Icahn’s significant share sale in September, amidst volatile refined product prices.

The Bearish Scenario

The lingering question pertains to Carl Icahn’s divestment being an isolated incident or the prelude to a trend. This uncertainty casts a shadow over any positive momentum CVI might accrue. The influence of finite short interest data, reported bi-monthly by the Financial Industry Regulatory Authority, also adds an element of unpredictability.

Kohl’s (KSS)

Kohl’s (KSS) has witnessed a remarkable 50% upsurge since mid-October, triggering a concurrent surge in short positions that currently account for nearly a third of the company’s floating shares. However, the wariness of Wall Street toward this rally is justified, owing to Kohl’s status as an e-commerce underdog, overshadowed by heavyweights like Amazon.com (AMZN) and Walmart (WMT).

An Alarming Outlook

Despite the allure of a 7.6% yield, reflected as an anomaly in the retail sector, Kohl’s struggles with declining sales and profits, while a payout ratio of over 80% restricts its capacity for reinvestment.

SL Green Realty (SLG)

The final contender, SL Green Realty, mirrors the uncertain narrative shared by its peers. Short sellers have taken a substantial position opposite a high dividend yield of 7.9%. This reclusive stance of short sellers could potentially unravel, paving the way for an unforeseen upswing in SLG shares.

Why SL Green Realty and Riley Financial Are Making Investors Sweat

SL Green Realty (SLG) has been riding the wave of a strong rally that saw it more than double from its 2023 lows to the New Year. This surge, however, owes more to falling Treasury yields than improving fundamentals. The company’s short squeeze may be a thing of the past, but with short interest still hovering around 30%, the question looms: Is there more room to run? Despite efforts to bolster liquidity and pay down debt, a dividend cut and plans to sell additional property interests in the coming year are raising concerns about future returns for income-focused investors.

SLG’s 2023 Blast-Off Has Been Jettisoning the Shorts

Meanwhile, Riley Financial (RILY) is facing a different set of challenges. The company, involved in various financial services, has seen its shares plummet by 70% amidst a probe into its deals with a former CEO linked to a failed hedge fund. The uncertainty surrounding this investigation, combined with questions about the company’s dividend sustainability due to its inadequate free cash, is leaving investors apprehensive.

And the Bears Are Hungry for More

While high yields can be enticing, especially in the face of soaring retirement costs due to inflation, investors should be cautious not to sacrifice quality for a few extra percentage points. The key is to find investment opportunities that offer big yields, growth potential, a reasonable price, and the ability to weather economic headwinds. This approach is exemplified in the author’s “Perfect Income” portfolio, which targets high-yield holdings with the potential to thrive independent of market trends and uncertainties.

These investments need to meet specific criteria: consistent, predictable payments; resilience in market downturns; double-digit returns from secure investments; minimal management time; and most importantly, avoidance of risky strategies. This strategy aims to provide stability and security for investors, empowering them to take control of their financial legacy while still aiming for lucrative returns.