If there is one aspect of society that has endured the test of time, it is sin. Some investors choose to shun sin stocks, but those tend to be somewhat underpriced and less prone to economic downturns. So, if you have a long-term outlook and want to prioritize investment returns over what some might consider problematic industries, consider adding a bit of sin to your portfolio.
Key Takeaways
- Sinful stocks, including p*rn stocks, gambling stocks, and tobacco stocks, present investors with some tough but potentially lucrative choices.
- ETF companies have even made it easier for you to invest in sinful companies and get instant diversification in the industry.
- While demand for things like tobacco and alcohol is certainly stable, sin stocks face higher regulatory and taxation risks than the average company.
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What Is Sinful Investing?
A sinful stock is a stock from a company that is associated with (or is directly involved in) activities considered unethical or immoral by some people, such as gambling or tobacco.
However, the thing with ethics and morality is that there is no universally accepted definition of what is or what is not ethical or moral. For example, one investor may view certain advertising campaigns as unethical and brand the product or the ad company as a sinful investment. Another investor may see no ethical compromise in thesituation. In discussing sinful investing, there is some gray area in defining a stock as sinful.
However, some sectors of the economy are generally considered sinful, such as the gambling, alcohol, tobacco, sex, and defense industries. Below, we explore some of these so-called sinful industries.
Gambling Stocks
Just one trip to Las Vegas or Atlantic City will show you the huge size of the gambling industry. In Vegas alone, numerous casino operators have market capitalizations in the multibillion-dollar range.
In addition to the casino and hotel operators, there is the less sexy end of the business: maintaining the hardware to keep the casinos full. The industry also encompasses racetrack operators and sports betting companies.
Some of the biggest gambling stocks include casino operators such as Las Vegas Sands (LVS), MGM Resorts (MGM), and Caesars Entertainment (CZR), as well as fantasy sports operators such as Flutter Entertainment (FLUT) and DraftKings (DKNG).
One thing is clear: gambling is not going away anytime soon. If anything, sports gambling's popularity has soared—up 27.5% in 2023—with more and more online options for placing bets.
Alcohol Stocks
The profitability of beer, wine,and spirits has been something companies have capitalized on for hundreds of years. While the majority of vineyards are private, there are plenty of brewers and distillers that are publicly traded.
Curious investors can invest in various wine stocks, beer stocks, and liquor companies. The best part? These stocks have the potential to provide market-topping returns.
As of May 8, 2024, alcohol stocks Constellation Brands (STZ) and Fresh Vine Wine (VINE) are up 14.83% and 38.61%, respectively, over the prior year.
Tobacco Stocks
Tobacco and cigarette companies remain profitable despite a firestorm of class-action lawsuits at the end of the millennium and the billions of dollars spent in settlement payouts.
Even if smoking has become less vogue in North America, the rest of the world continues to puff away. Huge markets remain for tobacco products for the foreseeable future.
For example, cigarette giants Altria (MO) and Philip Morris International (PM) returned 3.35% and 8.23% over the past year as of May 8, 2024.
The Dividend King
In 2019, Altria's board voted to increase the regular quarterly dividend for the 54th time in 50 years. Altria's dividends have increased every year from 2009 through 2023.
Sex Stocks
The sex industry is so enormous, though much of it is underground, which makes it hard to find precise industry figures. However, several companies in the p*rnography industry, condom manufacturing, and even makers of drugs designed to enhance a sexual experience have gone public.
Like gambling, the Internet brings a whole new dimension to this business. It may be a taboo subject, but companies are doing very well selling p*rnography on the Internet (though most of these firms are not publicly traded).
Even if you ignore the more brazen and visible operators, like Playboy and Hustler, there are a great many more innocuous industries that benefit from the sale of sex, such as hotel and cable operators that make handsome sums from their pay-per-view movies.
A good publicly traded example of a sex stock is RCI Hospitality Holdings (RICK). The company owns and operates upscale adult nightclubs such as Rick's Cabaret, Jaguars Club, Tootsie's Cabaret, and XTC Cabaret.
Defense Stocks
Although the defense industry represents one of those gray areas that we alluded to earlier, in most circles, these stocks are considered sinful.
The production of missiles, guns, tanks, and fighter jets can be interpreted differently. Either you view it as destructive and harmful to the entire human race, to those in the country where the arms are destined, or you may feel that it is simply a proactive measure for protecting one's nation.
Regardless of your ethical or moral stance on the issue, there is no debate on the profitability of the manufacture, sale,and distribution of military equipment. One example of a defense stock includes Lockheed Martin (LMT).
Irresistible Returns
Industries that lure us with "naughty" temptations can offer a good place to park a portion of your portfolio. First, these companies provide relatively stable returns to investors, both in good times and bad.
As the old saying goes, "What do you do to celebrate good times? Drink, smoke, gamble, and have sex." And what do many do during stressful and recessionary times? "Drink, smoke, gamble, and have sex."
The returns provided by the companies related to these activities are often less prone to the cyclical downturns of the economy. They provide respectable returns in times of prosperity and welcome returns during market and economic slumps.
In addition to being somewhat insulated from the economy's cyclical nature, many sin stocks are renowned for providing consistent dividend payments.
Why Do It?
The simple answer isinvestment returns. Many companies in these industries have, time and again, turned a healthy profit and will continue to do so. Neglecting all of these industries' companies may restrict your portfolio's ability to make some solid gains. It's easy to understand why; many of these businesses revolve around addiction.
Gambling, tobacco, and alcohol are all habit-forming products or activities. Here is where the morality argument comes in. Few would debate that cigarette smokers or frequent gamblers are very loyal customers. But is it ethical to keep taking a gambler's money even though they have a serious problem? What about selling beer to an alcoholic? There are no easy answers here, and each investor has to decide personally.
While we wouldn't suggest a portfolio consisting only of sinful stocks, holding a portion of it in a balanced portfolio is worth considering. Just as in all industries, there will be firms that outperform others, and by no means will all stocks involved in these types of businesses be prosperous. You will still have to do your homework to select the best ones.
How To Invest?
ETF companies have even made it easier for you to invest in sinful companies and get instant diversification in the industry. Issuers like Invesco, VanEck, ETFMG, and AdvisorShares all offer ETFs that invest along these lines, a socially responsible investor's nightmare.
Take, for instance, the AdvisorShares Vice ETF (VICE). This ETF seeks long-term growth by investing in "vice" companies such as those involved with alcohol, tobacco, gaming, and other vice-related activities. Some of the fund's biggest holdings include Turning Point Brands (TPB), Church & Dwight (CHD), and Molson Coors Beverage (TAP).
If marijuana is your sinful stock of choice, take a look at the Amplify Alternative Harvest ETF (MJ). MJ tracks the Prime Alternative Harvest Index, designed to measure companies' performance in both the global medicinal and recreational cannabis sectors. Its top holdings include Tilray Brands (TLRY), Canopy Growth (CGC), and Cronos Group (CRON).
The VanEck Vectors Gaming ETF (BJK) is another easy way to jump into sin stocks. This ETF aims to mimic the MVIS Global Gaming Index, an index designed to track the overall performance of companies involved in casinos, sports betting, lottery services, gaming services, and gaming technology. A few of the ETF's top holdings include Las Vegas Sands, Caesars Entertainment, MGM Resorts, and DraftKings.
Finally, if you'd like a little bit more diversification, you can try the Invesco Leisure and Entertainment ETF (PEJ). PEJ is based on Dynamic Leisure & Entertainment Intellidex, comprising 30 U.S. companies in the leisure and entertainment industries. Some of the ETF's holdings include gambling stocks like Royal Caribbean Cruises (RCL), DoorDash (DASH), and Warner Bros Discovery (WBD). So, while PEJ isn't exactly a "pure" play on sinful investing, it still allows you to gain some exposure to vice-based businesses while staying diversified.
Just as ETF families may offer technology or an energy fund, investors can now access diversification and professional management within the tobacco, gambling, alcohol, defense,and sex industries.
You can be sure that a socially conscious investor wouldn't even consider participating in these investments. But for some, investing means nothing more than finding companies that stand the test of time and make a lot of money.
On the other hand, if you feel a company does not meet your social standards, speak up with your dollars and refrain from investing.
Advantages and Disadvantages of Sin Stocks
There are several advantages to investing in sin stocks. As we've discussed, the biggest benefit is the upside potential they can provide, whether the overall market is climbing or declining. Sin stocks are far more immune to economic shocks than more cyclical businesses.
Let's face it: people drink, smoke, gamble, and have sex in both good times and bad.
Sin stocks also benefit from monopolistic returns. Industries like tobacco, alcohol, and gambling are highly regulated, so the big companies already entrenched in the space often have very little competition.
Sin stocks can provide market-beating returns, nicely complemented by historical stability. That's the best of both worlds.
Another advantage of sin stocks is that they tend to be systematically underpriced. In other words, you can usually pick them up at "bargain" prices. Since sin stocks carry such a negative stigma, many investors avoid them. However, other investors can scoop them up at cheap risk-adjusted prices.
Of course, there are disadvantages to investing in sin stocks. While demand for things like tobacco and alcohol is certainly stable, sin stocks face higher regulatory and taxation risks than the average company. Since so many ethical questions are tied to these industries, they're always vulnerable to shifts in national and political opinion.
The Bottom Line
Whether or not you agree with sinful investing is a personal choice; however, human weaknesses and the lure of sinful pleasures are unlikely to disappear soon. If you have a long-term outlook and seek a little excitement, try adding a bit of peccadillo to your portfolio.
