Prospect Capital Corporation (PSEC): Among the Cheap Dividend Stocks Being Targeted by Short Sellers

We recently published a list of the 25 Cheap Dividend Stocks Being Targeted by Short Sellers. In this article, we are going to take a look at where Prospect Capital Corporation (NASDAQ:PSEC) stands against other cheap dividend stocks.

Short sellers — investors who profit from falling stock prices —are seeing a surge in success in 2025. They gained $159 billion in paper profits over just six trading sessions as escalating trade tensions triggered a drop of more than 10% in the US stock market. The sharp market decline, the steepest since 2022, followed President Donald Trump’s announcement of broad global tariffs. According to S3 Partners LLC, the most lucrative short position during this period was against the SPY ETF, which tracks the S&P Index. Traders betting against this fund have racked up over $6.1 billion in paper gains so far this month, based on an April 8 report from S3.

Short sellers could profit from the sharp intraday market swings that wiped out trillions in value, though their actual gains will depend on when they close their positions. S3 data showed that another $46 billion in new short bets were added in April, raising the risk that these bearish positions could intensify the market’s next major move, particularly if the current downturn reverses and pushes major indexes higher. Ihor Dusaniwsky, managing director of predictive analytics at S3, made the following comment:

“Overall, the short side was an extraordinarily profitable trade up and down the market during this correction. 81% of every short trade was profitable and 97% of every dollar shorted was a profitable trade.”

Another report from S&P Dow Jones Indices noted that the average short interest in US stocks rose to 87 basis points over the past month. The biggest jumps were observed in the Automobiles sector, which climbed by 11 basis points, followed by a 10 basis-point increase in the Commercial and Professional Services sector, and a 9 basis-point rise in the Food and Beverage sector.

Although dividend-paying stocks are generally considered more stable than growth stocks, they have still been subject to short selling throughout history. In their 1998 study Who Trades Around the Ex-Dividend Day?, Jennifer Lynch Koski and John T. Scruggs found unusual trading patterns leading up to the ex-dividend date. They suggested that security dealers might short a stock while it still includes the dividend and then repurchase it after the ex-dividend date if they expect the stock’s price drop to be larger than the dividend amount.

Similarly, in their research paper Tax-Induced Trading Around Ex-Dividend Days, Josef Lakonishok and Theo Vermaelen observed unusual levels of short selling on and shortly after the ex-dividend date. They found that this activity tends to be more pronounced in stocks offering higher dividend yields. Their findings suggest that short sellers aim to minimize the typical price drop that often follows the ex-dividend date.

Our Methodology

For this article, we screened for dividend stocks with more than 3% of their float sold short, using data from Yahoo Finance recorded on April 15. From that group, we picked stocks with dividend yields above 3%, as of April 28. Companies offering high dividend yields are often more likely to attract the attention of short sellers. The stocks are ranked in ascending order of their short % of float.

At Insider Monkey, we are obsessed with hedge funds. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).

Prospect Capital Corporation (NASDAQ:PSEC)

Short % of Float as of April 15: 7.05%

Dividend Yield as of April 28: 14.75%

Prospect Capital Corporation (NASDAQ:PSEC) is a New York-based business development company that invests in debt and equity in US middle-market businesses across various industries, aiming to provide consistent and attractive returns to its shareholders. The company’s high dividend yield, coupled with last year’s dividend cut, has made it an appealing target for short sellers. While it continues to pay dividends monthly, the reduction in dividends didn’t sit well with income investors. Since the start of 2025, the stock has declined by over 14%.

In the fourth quarter of 2024, Prospect Capital Corporation (NASDAQ:PSEC) reported revenue of $185.4 million, down by over 12% from the same period last year. The revenue also missed analysts’ estimates by $4.2 million. Payment-in-kind income dropped to $20 million, representing a 39% decline from the previous quarter and nearly a 50% decrease compared to June 2024. The company also carries long-term debt obligations that are scheduled to be repaid over the next 27 years. Additionally, PSEC has committed to $62 million in future investments, though it retains discretion over $29 million of that amount.

However, Prospect Capital Corporation (NASDAQ:PSEC)’s EPS of $0.20 beat the consensus by $0.06. Interest income made up 91% of the company’s total investment income, highlighting the strength of its recurring revenue stream. Moreover, despite announcing a dividend cut last year, the company has maintained regular payouts for 94 months. Currently, it pays a monthly dividend of $0.045 per share and has a dividend yield of 14.75%, as of April 28.

Overall, PSEC ranks 17th on our list of the dividend stocks targeted by short sellers. While we acknowledge the potential of PSEC as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for a deeply undervalued dividend stock that is more promising than PSEC but that trades at 10 times its earnings and grows its earnings at double digit rates annually, check out our report about the dirt cheap dividend stock.

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Disclosure: None. This article is originally published at Insider Monkey.