What does it do?
Dibella's Compulsion is a spell in the form of a Lesser Power. It has no cost and works as a shout with a fairly narrow cone of effect and no cooldown.
The spell can be obtained through a spell tome bought from most vendors who sell low level spells, such as Farengar Secret-Fire in Whiterun.
The fluff (and spell description) is "A whisper channeling Dibella's will compels fertile adults to openly show their natural beauty to the world."
What this means is that only playable races will be affected. Therefore children and elders are not, since they are not playable. To avoid gamebreaking exploitation it is not usable on NPC's in combat or currently searching for a target.
Targets caught in the cone will unequip items in most slots. They will still carry them, just not equipped. The spell is not hostile so they will not become aggressive. If used on a follower they will re-equip their gear as soon as you trade something with them, but other NPC's will stay naked for much longer (roughly 2 days when you're not in their area).