Sin stocks sound sexier than the reality — this is finance, after all. These stocks are shares of companies engaged in industries that some people consider unethical or immoral.
The exact definition of a sin stock depends on the beholder, but alcohol, tobacco and gambling (sometimes called “gaming”) usually top the list. Some investors might also include weapons manufacturers or defense contractors. Marijuana stocks, a market newcomer, could qualify, too.
Why are sin stocks attractive?
Sin companies often face additional taxes or regulations. Tobacco products are subject to special excise taxes, and many states require a more controlled distribution system for alcoholic products. Similarly, gambling is often limited to certain geographic areas and requires a specific license.
Paradoxically, these regulations often help entrench the incumbent companies. For example, states typically issue a limited number of gambling licenses, which keeps many rivals from entering the market. The tiered alcohol distribution system in many states can also limit competition. Reduced competition can make these industries more profitable for the remaining players.
Also, alcohol and tobacco are recession-resistant — people buy them regardless of the economic climate. This tends to keep profits up, allowing those companies to pay generous and growing dividends. Altria (the name behind Marlboro cigarettes) has treated investors to 20% annual returns on average since 1968 — an astounding record — all the while growing its dividend payout. Spirits behemoth Diageo has turned in better than 10% annual returns for the past 10 years and paid nearly 40% of the purchase price in cash dividends.
» MORE: How to invest in dividend stocks
Are sin stocks right for you?
Whether sin stocks are right for your portfolio is a question of personal preference. Some investors won’t buy any sin stocks, while others see alcohol as fine but not tobacco or firearms, for example.
You may already own a piece of them through an S&P 500 index fund or another broad-based index fund, although sin stocks represent only a small part of these funds. For large index funds, the holdings are a matter of public record, and it’s easy to find the components of the most well-known, the S&P 500, with a simple web search.
Here are some of the major players in three main categories.
• Altria • Philip Morris International • British American Tobacco
• Diageo • Anheuser-Busch InBev • Molson Coors Brewing • Boston Beer
• Las Vegas Sands • Caesars Entertainment • Wynn Resorts • MGM Resorts International
If you’re all in on sin stocks, you could choose to invest in an exchange-traded fund focusing on them. One of the newest entrants is the AdvisorShares Vice ETF. It concentrates on alcohol, tobacco and cannabis stocks. Other ETFs may be more narrowly focused, such as on the gambling or alcohol industry.
If you want to avoid them, however, you can opt for socially responsible investing, which can also offer attractive returns. Another option is to find a brokerage that offers halal investing, which complies with Islamic law by avoiding gambling, alcohol, tobacco and firearm industries, as well as companies that get significant income from interest on loans.