Stock Quotes in this Article: EXC, GRMN, KMP, PBI, RRD

BALTIMORE (Stockpickr) -- It’s open season for income-seekers right now. As we approach the start of 2012, the dividend yield on the S&P 500 is the highest it’s been since 2009, back when stocks were trading at a tremendous discount, and bargains were easy to come by. That fact has special implications for investors looking for a short squeeze driven rally.

You see, with corporate profits sitting at an all-time high for the S&P 500 and the Dow, it makes sense to focus on stocks that are willing to share their cash with shareholders. That means that the onus is on dividend-payers once again.

Not everyone shares that sentiment, however. Heavy shorting in a handful of high-yield dividend-payers is providing a prime short squeeze opportunity right now.

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In case you’re not familiar with the term, a short squeeze is the buying frenzy that ensues when a heavily shorted stock starts to look attractive again to investors, causing share price to skyrocket. One of the best indicators of just how high a short-squeezed stock could go is the short interest ratio, which estimates the number of days it would take for short-sellers to cover their positions. The higher the short ratio, the higher the potential profits when the shorts get squeezed.

Naturally, these plays aren’t without their blemishes -- there’s a reason that these stocks are being heavily shorted. But for investors looking for exposure to a speculative play with a beefier risk/reward tradeoff, these could be powerful upside plays for the coming year.

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With that, here’s a look at five stocks with a mix of hefty dividends and explosive price potential in 2011.

Excelon

2011 has been a fairly flat year for shares of Excelon (EXC); year-to-date, the $28 billion power utility has swung 15% from peak to trough, vs. swings of 23.5% from the S&P 500. While Excelon is only up 1.9% on the year, factoring in the firm’s 4.95% dividend yield ratchets up that performance dramatically.

Comparatively good performance hasn’t spared this company from heavy shorting, though; a short interest ratio of 8.53 means that it would take nearly two weeks of buying for shorts to exit their positions at current volume levels.

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Part of the reason for Excelon’s short interest is the firm’s pending merger with Constellation Energy Group (CEG), a deal that’s been slow-moving thanks to a minefield of government regulators whose approval is needed to proceed. While those regulatory risks could serve as a stumbling block for Excelon’s share price, they’re ultimately overshadowed by the long-term benefits that would result from the merger.

Excelon owns a mix of both regulated and unregulated businesses, including a fairly standard utility business and a somewhat riskier merchant generation and trading arm. The firm’s lack of exposure to most commodity prices is a major benefit -- especially in an inflationary scenario where the costs of output (power) exceed the cost of input.

 

While the utility business is capital-intense, and the merger would make Excelon’s balance sheet somewhat less attractive, this firm is in strong enough financial health to justify being a buyer right now.

Kinder Morgan Energy Partners

Kinder Morgan Energy Partners (KMP) is another name that’s facing high short interest and uncertainty pending a merger. The $27 billion energy billion pipeline MLP is in the process of acquiring El Paso (EP), an energy company with pipeline assets as well as an exploration and production business.

At present, KMP sports a dividend yield of 5.72%, and a short ratio of 10.4, making it a prime high-yield short squeeze candidate.

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The biggest change from the acquisition of El Paso’s pipeline assets is scale. El Paso owns the largest pipeline network in the U.S., and when combined with KMP’s 37,000 miles of pipeline, the combination is a size advantage for an industry leader that already has a sizable economic moat. That scale should afford the partnership with the ability to generate meaningful distribution growth for shareholders -- something that income-seekers are actively searching for in this environment.

Because of Kinder Morgan’s MLP status, the partnership is required to pass the vast majority of its earnings directly onto shareholders in the form of distributions. While that means that KMP’s balance sheet appears relatively leveraged, its financial health is quite strong thanks to massive cash flow generation capabilities. Access to capital markets provides a stopgap if additional cash becomes necessary down the road.

Garmin

The most heavily shorted name on this list is Garmin (GRMN), the $7.5 billion GPS maker whose name is nearly synonymous with navigation systems; the firm’s short interest ratio of 23.94 means that it would take more than a month of buying pressure for shorts to cover their positions at current volume levels. While short-selling in this stock has been heavy, sellers have been getting summarily hammered this year as GRMN climbed 24.56%. A short squeeze could realistically propel this stock higher in the near-term.

Garmin’s positioning in the GPS business has been the company’s key to success as well as the number-one short thesis for shares. In recent years, the popularity of consumer GPS devices has driven Garmin’s sales, while at the same time making the firm a target for competitors and short sellers. But investors’ views on this firm’s economic moat are skewed. While the automotive GPS segment has become commoditized in recent years, the firm has found growth in the fitness market, where its products are being integrated into sport watches and cycling computers.

All the while, the company’s R&D-intensive aviation segment is developing impressive next-generation technology that can trickle down to the consumer end of the business to at least some degree. That factor helps to keep margins deep in consumer products, and keeps Garmin’s technology offerings ahead of rivals. A 4.15% dividend yield (Garmin is one of the top-yielding electronics stocks) and a debt-free balance sheet seriously sweeten the pot for shareholders.

For another take on Garmin, the stock is included on a recent list of 5 Stocks JPMorgan Warns to Absolutely Avoid.

Pitney Bowes

While 2011 has been less kind to Pitney Bowes (PBI) -- shares of the mail solutions company have fallen every bit as much as Garmin has rallied this year -- the firm is another example of a heavily shorted name that could move higher as short sellers scramble to cover their positions. The company currently has a short interest ratio of 12.65, as well as a dividend yield of 8.06%, making it one of the top-yielding consumer durables stocks.

Pitney Bowes is the leader in the outsourced mailroom business, an industry that’s been getting hammered in an environment where its biggest partner, the U.S. Postal Service, is struggling to stay afloat. PBI earns the majority of its profits through the sale of digital postage, a business that should continue to perform well as long as businesses still need to mail documents and the Postal Service continues to keep tight reigns on its partners.

A reasonably strong balance sheet could be made even stronger if PBI decides to use some of its excess cash to pay down debt in addition to shareholders.

Pitney Bowes is one of 12 stocks in the December's High-Yield Dividend Champion Portfolio.

R.R. Donnelley & Sons

Commercial printing giant R.R. Donnelley & Sons (RRD) is another name that fuels a hefty dividend payout with a legacy business. While investors may be anxious about the future of the printing business, that 147-year-old operation is the engine behind a 7.3% dividend yield. (R.R. Donnelley is one of the top-yielding diversified services stocks.)

Scale is a major advantage for Donnelley, one that affords the firm recurring revenues and a stable customer base. Because only a handful of printers in the U.S. can handle the print quantities that Donnelley can, the company is able to count almost 95% of the Fortune 500 among its client base. Declining print demand is a major concern for the firm in the long run, but a recent push toward more niche services and an ample capital base should keep the firm a step ahead.

A short interest ratio of 8.94 means that it would take nearly two weeks for shorts to cover their positions in Donnelley.

To see this week’s short squeezes in action, check out the High-Yield Short Squeezes portfolio on Stockpickr.

-- Written by Jonas Elmerraji in Baltimore.

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At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.