Contrarian Ideas: High-Yield Dividend Stocks Dragged Down by Excessive Pessimism

Dividend stocks come with a number of unique investor benefits: a steady stream of income from quarterly payouts, compounded interest, plus the promise of relative stability in a still-shaky market. But before you bet the farm on big dividend payers, you may want to take a closer look -- because high dividend yields don't always guarantee high returns. 

It's important to keep in mind that dividend yield is only a relative measure, a ratio comparing how much a company pays out in dividends to its price per share. Which means that when a stock sees a high yield, this could merely owe to a sharp drop in price ...

And just because a stock is cheap doesn't mean it's a bargain -- chances are, there's a good reason for the decline. So dividend investors need to be cautious, and be sure that the risks don't outweigh the potential rewards.  

That said, there is such thing as being too careful -- investor pessimism, when taken to extremes, can push a stock below fair value. But the fear of others could create a potential windfall for contrarian investors prepared to bet against the crowd. 

To help you find contrarian ideas, we've compiled a list of high dividend yield stocks being targeted by short-sellers and options traders. Short-sellers sell high to buy low, meaning they profit from a plummeting price. All of the stocks in our list have seen an increase in shorted shares over the last month (i.e., short-sellers think these stocks are vulnerable)

Then, we looked to the options market, to get a sense of the sentiment around these stocks. Options traders bid on the future right to buy or sell a stock at a pre-determined price -- and in so doing, they take on a huge amount of risk. We screened for stocks with a large put option contract open interest relative to call option open interest, a sign of bearish sentiment in the options market.

Short-sellers and options traders alike are betting against this list of stocks -- and if you're a contrarian, this excessive pessimism might raise a flag. (Click here to access free, interactive tools to analyze these ideas.)

Short data sourced from Yahoo! Finance, options data sourced from Schaeffer's. The list has been sorted by the average change of short positions and put/call volume.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.

Kapitall's Eben Esterhuizen and Alicia Sellitti do not own shares of any companies mentioned.