By Lee Sherman
While many investors these days focus on companies that contribute to the public good (socially responsible investing), others have turned to what are called “sin stocks,” the somewhat unethical or immoral stocks that are based on conspicuous consumption.
It’s perhaps not surprising that, while we are locked away in coronavirus induced exile, people are increasingly indulging in these “so called vices” and including sin stocks in a portfolio continues to represent a good way to ensure regular dividends. For example, alcohol sales are soaring right now and that’s not likely to change anytime soon.
So, what are “sin stocks” and how can they contribute to your portfolio? Think of such things as alcohol, tobacco, gambling, sex-related industries, and weapons manufacturers, the kinds of things that many (but not all) people might frown upon. We’re not here to judge but only to show the role that they can play in a portfolio that produces regular dividends.
Non-essential services can produce solid dividends
If your morals allow, sin stocks can play a big part in a low-risk investment strategy. A key aspect of sin stocks is that, no matter how poorly the economy is doing, these are products and services that consumers continue to purchase. If you can figure out what these things are, you’ll be well on your way to a bullet-proof portfolio. While it might seem counter-intuitive for consumers to buy non-essential items at a time when they should be pinching pennies, it is exactly these uncertain times that tend to make people reach for the bottle.
Consolidation has wiped out competition
Big alcohol and tobacco are industries that over the years have gone through a great deal of consolidation. There is little in the way of competition making an investment in a major brand such as Anheuser-Busch InBev or Philip Morris International a good way to protect your portfolio. Other types of sin stocks to consider might be casino and gaming companies like Caesars Entertainment Corp, or a military contractor like Boeing. For some, a company like General Motors might be considered a sin stock. Companies like this are (for better or worse) the backbone of the American economy and even when on the verge of bankruptcy tend to be first in line for a government bailout, making them a safe bet.
Go on the defensive
No matter where your moral compass points, keep in mind that investing in sin stocks is a defensive strategy, designed to protect against market corrections, and should not make up the majority of your portfolio. These stocks can strengthen your portfolio in times of economic uncertainty like the one we find ourselves in now. During the current crisis, we see that consumers aren’t spending anywhere near what they were on luxury items like high-end clothing and eating out and the hospitality industry has come to a standstill since high-end restaurants have closed and travel is on hold for the foreseeable future.
Sin stocks fall roughly into what is called the consumer staples sector. While it is possible to buy individual stocks, a financial advisor can help you pick out a Mutual Fund or ETF that concentrates on sin stocks. Most will recommend you limit your exposure to a relatively small allocation and resist the temptation to make too big a deal with the devil.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.