Short Sellers Lighten Up Bets Against Big Dividend Stocks (MO, AEP, NLY, T, DUK, KMB, KMP, MRK, PG, RAI, VZ)

Short sellers appear to be increasing their bets against some of the key dividend stocks we track, judging by the October 15 settlement date for the short interest versus the September 28 settlement date. While some dividends are set to rise before the end of 2012, it appears that the notion of a dividend bubble seems to be forming in at least some of these and other high payout shares.

We tracked the big short interest changes in the following 10 big dividend stocks: 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). What appears to be happening is that some investors seem to be betting that a dividend bubble is present in these shares.

Altria Group Inc. (NYSE: MO) saw a drop in the short interest ahead of earnings. The October 15 short interest was 39.84 million, down from 41.39 million at the end of September. The days to cover is about 3.5. The new payout is a yield of 5.4% now that shares have pulled back.

American Electric Power Co. Inc. (NYSE: AEP) saw a rather large drop of almost 15%, down to 6.11 million shares versus 7.18 million shares. The dividend is 4.2% now.

Annaly Capital Management Inc. (NYSE: NLY) is often considered the safest of the high payout mortgage REIT sector, and the short interest fell by close to 8% here, down to 36.5 million shares as short sellers may be getting out of the way of the first couple months of QE3. The last Annaly payout would generate a yield of just under 13%.

AT&T Inc. (NYSE: T) saw a massive drop that is way out of the norm, as the short interest fell to 48.67 million shares from 63.6 million shares. The days to cover is now only 1.73 days. AT&T’s dividend is about 5% and shares are now more than 10% off their highs.

Duke Energy Corp. (NYSE: DUK) saw a small gain in the short interest to 5.75 million shares, from 5.41 million shares last month. Duke still yields closer to 4.7% as its shares are further from a 52-week high compared to so many peers.

Kimberly-Clark Corp. (NYSE: KMB) saw the short interest drop only marginally to 8.47 million shares from 8.52 million shares. The yield here is about 3.4%.

Kinder Morgan Energy Partners L.P. (NYSE: KMP) saw a small gain in its short interest to 3.92 million shares from 3.88 million shares. While this might not be much of a gain, this is the highest short interest since the end of May. This is a “distribution” rather than a true dividend yield, it still screens out at 5.9% now.

Merck & Co. Inc. (NYSE: MRK) saw a recovery in its short interest as the shares sold short grew to 23.02 million from 21.82 million at the end of September. Merck yields 3.7%.

Procter & Gamble Co. (NYSE: PG) saw a significant drop in the short interest, down to 18.6 million shares from 22.96 million at the end of September. Maybe there was a bet that the activists would drive shares higher. P&G’s dividend is about 3.3%.

Reynolds American Inc. (NYSE: RAI) saw a small uptick in its short interest to 8.46 million shares from 8.17 million at the end of September. This is the highest short interest since the end of June. Reynolds has a yield of about 5.6%.

Verizon Communications Inc. (NYSE: VZ) saw a 4% drop in its short interest, down to 46.07 million shares from 48.24 million shares. Verizon’s dividend yield is close to 4.7% 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