Short Selling Activity in Big Dividend Stocks as Dividend Bubble Inflates (MO, AEP, NLY, T, DUK, KMB, KMP, MRK, PG, RAI, VZ)

Short sellers are still active in the high-dividend names out there. Apparently many are under the impression that the dividend bubble is worth betting against. Still, it takes keen conviction to short sell a stock that has a yield of 3% to 5%. While some dividends are set to rise before the end of 2012, it appears that the demand for dividends has continued even with all of the warnings of a dividend bubble.

We tracked the big short interest changes in the following 10 big dividend stocks, with the settlement date of September 14, compared to August 31 and prior dates: Altria Group Inc. (NYSE: MO), American Electric Power Co. Inc. (NYSE: AEP), Annaly Capital Management Inc. (NYSE: NLY), AT&T Inc. (NYSE: T), Duke Energy Corp. (NYSE: DUK), Kimberly Clark Corp. (NYSE: KMB), Kinder Morgan Energy Partners L.P. (NYSE: KMP), Merck & Co. Inc. (NYSE: MRK), Procter & Gamble Co. (NYSE: PG), Reynolds American Inc. (NYSE: RAI) and Verizon Communications Inc. (NYSE: VZ).

Altria Group Inc. (NYSE: MO) saw a small drop in the short interest as investors have gotten out of the way of that dividend hike. The short interest as of 9/14 was 44.18 million shares, versus 44.56 million shares short on 8/31. The peak was 50.8 million shares short at the end of July. Altria’s dividend after the hike is back above 5%.

American Electric Power Co. Inc. (NYSE: AEP) saw a gain in its short interest to 7.23 million shares short from 70.7 million shares short at the end of August. What stands out is that the days to cover is now almost 3.5, and that is another gain and the highest reading this year. AEP yields only 4.2% now that shares are at highs.

Annaly Capital Management Inc. (NYSE: NLY) takes some real guts to short because of that double-digit dividend yield. The short interest at the 9/14 settlement date fell by less than 1% to 34.83 million shares from 35.01 million shares short at the end of August. The 3.5 days to cover is down from almost 4.6 days to cover in the prior report. Annaly yields more than 11%.

AT&T Inc. (NYSE: T) saw only a small gain in the short interest to 63.6 million shares, versus 63.2 million shares at the end of August. The days to cover however did dip to 2.6 from 3.02 in the same period. The AT&T dividend now only screens at 4.6% due to appreciation in the share price.

Duke Energy Corp. (NYSE: DUK) saw a small drop in the short interest to 5.62 million shares short as of 9/14, versus 5.76 million share short at the end of August. Duke’s common stock now yields about 4.7%.

Kimberly-Clark Corp. (NYSE: KMB) saw yet another drop in the short interest to 6.69 million shares short as of 9/14 from 7.39 million shares short as of 8/31. This is down from the peak of 10.91 million shares short as of 7/13. The dividend here is 3.5%.

Kinder Morgan Energy Partners L.P. (NYSE: KMP) saw a decent gain in its short interest to 3.89 million shares as of 9/14 from 3.58 million shares short as of 8/31. This is the highest short interest since the 4.24 million shares short at the end of May. The days to cover dipped but is still high at 7.9 days. This dividend is actually a payout, as some is a return of capital, but that equivalent is 5.9%.

Merck & Co. Inc. (NYSE: MRK) saw a gain with the short interest growing to 25.039 million shares short as of 9/14, versus 24.031 million shares short as of 8/31. Merck’s dividend is 3.7%.

Procter & Gamble Co. (NYSE: PG) saw only a small increase in its short interest, rising to 19.45 million shares as of 9/14 from 19.16 million shares as of 8/31. The activist efforts are working as shares are now close to a 52-week high, and the dividend yield is 3.2%.

Reynolds American Inc. (NYSE: RAI) saw a rather large drop in its short interest: 6.287 million shares as of 9/14 from 7.266 million shares as of 8/31. Reynolds pays a dividend yield near 5.4%.

Verizon Communications Inc. (NYSE: VZ) saw a larger gain in the short interest than AT&T saw. The 9/14 settlement date short interest was 43.4 million shares, a gain of 6.1% from the short interest of 40.9 million shares as of 8/31. Verizon yields about 4.5% as of now.

As a reminder, it takes a lot more conviction to short a stock that has a very high dividend. On top of having to pay a broker loan-call rate to borrow the stock, the dividend payouts and the ex-dates play into the equation as well.

JON C. OGG