Sin stocks: You hate them until you invest in them

Huge dividend growth. A record of clobbering the S&P. There's almost nothing for investors to dislike about these companies -- except perhaps the products they produce.

By InvestingAnswers May 29, 2013 11:09AM
Man smoking (© Steve Mason/Photodisc Blue/Getty Images)By David Sterman

More than a decade ago, major tobacco companies faced a possibly lethal headache.

The U.S. government wanted to make life a lot tougher for them in a bid to reduce the incidence of lung cancer. A "Tobacco Master Settlement Agreement" was signed in 1998, which entailed billions of dollars in fines, tighter restrictions on the sale of tobacco and very high excise taxes. Predictably, U.S. tobacco sales have been falling ever since.

Yet here's the rub: Tobacco stocks went on to become great investments.

The major industry players such as Philip Morris (PM) and Lorillard (LO) simply decided to stop making new investments in their businesses, and instead have been squeezing out as much cash as possible from their slowly dying businesses. And investors have been handsomely rewarded: Lorillard, which owns tobacco brands such as Kent, Newport and True has managed to boost its dividend a whopping 27% annually over the past three years.

That growth is why it's unwise to simply shun tobacco, alcohol, firearms and gaming companies, known collectively as "sin stocks." You may not be a consumer of their products, but they can become impressive investments.

The key when it comes to sin investing is determining your personal line in the sand. For example, I consume alcohol, I don't smoke but have friends who do, and I have a personal bias against firearms. So for me, alcohol and tobacco stocks are just fine, though I steer clear of gunmakers such as Sturm Ruger (RGR) and Smith & Wesson (SWHC). A friend of mine who is active in her church is a supporter of gun rights and owns shares of those gunmakers, but her religious views lead her to shun alcohol stocks.
To each their own.

Where to invest
Which kind of sin stock is the best investment? There really is no simple answer. Yet it's abundantly clear that when the crowd is shunning a specific type of sin stock, opportunity can emerge. A decade ago, few would have thought about buying tobacco stocks, but the intrepid few that saw the great dividend streams ahead proved to be quite prescient.

Investors have been wagering on sin for more than a decade. In 2002, the Vice Fund (VICEX) was launched, and it has risen roughly 150% since (compared to a roughly 100% gain for the S&P 500 ($INX) in that time frame). Nearly one-fifth of the portfolio is invested in tobacco stocks, while casino operators, liquor producers and other companies flesh out the holdings. The 1.76% annual expense ratio is about average for mutual funds.

There aren't many options for ETF investors. One of the few choices -- the Market Vectors Gaming ETF (BJK), which focuses on casino stocks -- has handily outperformed the S&P 500 over the past few years, thanks to hefty exposure to the robust casino growth in Macau. Morningstar's analysts think that investors need to understand that gaming is now a global phenomenon "with governments worldwide beginning to allow it as a way to generate additional tax revenues and spur economic development."

The Investing Answer: Sin stocks may not appeal to everyone. Indeed, some feel strongly that it's best to align your personal social views with your investing philosophy. Still, to build the strongest long-term portfolio possible, it's OK to loosen your tie a bit.

David Sterman does not personally hold positions in any securities mentioned in this article. 

More from InvestingAnswers
May 29, 2013 12:12PM

Yup, Tobacco, has been much better than a "great investment" they have been spectacular...


Plus the 3 we hold pay an average of about 5.3 - 5.5%, those are just extra coupons ontop of the appreciation....Long term for years.

May 29, 2013 1:28PM



Only last week, the new Edelman public relations survey said the financial services profession is the least respected of eighteen professions surveyed. Two German economists announced their research suggests capitalism is making us "evil." Finally, Pope Francis said money simply seeking the highest returns is causing many of the world's major problems. In short, it might have been better to close by saying "I believe it's ok to loosen your tie." A few investors, and yes they may be few these days, still believe Gandhi was correct that, "One man cannot do good on one area of life while doing harm in another area. Life is one indivisible whole." And my mentor Sir John Templeton, about whom I've written two books, believed he made sufficient returns even though he declined to invest in the sin stocks.


Gary Moore

Founder, The Financial Seminary

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