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Sinfully Good Dividends
Socially responsible investing (SRI) has been gaining steam lately as many investors have tried to a line their moral and ethical convictions with their portfolios. By combining certain social and moral criteria with precise investment standards, fans of SRI investing hope they can find securities that will earn competitive returns and ultimately build a better world.
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Funds like the iShares KLD 400 Social Index (NYSE:DSI) or the FaithShares Catholic Values ETF (NYSE:FCV) have launched to take advantage of this new trend. After all, almost one out of every nine dollars in assets under management in the United States incorporated some sort of environment, sustainability and governance screen (ESG) as of 2007. However, investors strictly focusing their efforts on righteousness may be missing out on some good returns.
The Win in Sin
While SRI and ESG investing is experiencing a resurgence, those who align their portfolios on the other side of the fence have making all the profits. So called sin industries such alcohol, gambling, weapons and tobacco have outperformed their ethical counterparts. A recent report by Merrill Lynch which examined the performance of tobacco, alcohol and casino stocks during all of the recessions since 1970, found that while the broad S&P 500 fell by 1.5% on average, the sin sector rose by an average 11%. During the great tech meltdown, the broad market fell 20% between June of 2001 and 2002. However, during that time tobacco stocks gained 8% and gambling related stocks nearly 20%.
According to a study published in the Journal of Financial Economics, companies related to sin industries have produced yearly returns 3.5% higher than other stocks. In addition, institutional managers also own fewer shares of sin companies; owning only 23% of outstanding shares versus around 28% from firms such Clorox (NYSE:CLX). This causes sin industry stocks to trade at 15-20% discounts relative to their peers.
Finally, many sin stocks have strong balance sheets and steady free cash flow. Their "addictive" nature leads to steady returns, high dividends and a way to reduce portfolio volatility.
Harvesting Big Dividends
Investors willing to put morals aside may want to consider adding some sin to portfolio. Funds such as the USA Mutual's The Vice Fund (VICEX) or the Market Vectors Gaming ETF (NYSE:BJK) are good places to start a position in the sector, however larger dividends can be had if investors go it alone. Here are a few picks.
Selling cigarettes in almost every country in the world, British American Tobacco (NYSE:BTI) could be investors first stop for a global tobacco play. The firm receives the bulk of its revenue from faster growing emerging markets in Asia, Africa and the Middle East. The firm's global reach and exposure to the developing middle classes of the world has shares of the company trade at a slight premium to the other global tobacco play, Philip Morris International (NYSE:PM). British American yields 4.27%.
Brewer Molson Coors Brewing Company (NYSE:TAP) offers a higher dividend yield (currently 2.4%) than other producers in the sector such as Anheuser-Busch InBev (NYSE:BUD). Volume of beer sold has been declining in North America and the United Kingdom, but the stock is firmly in value territory, trading a P/E of around 10.
We all know that "the house always wins" when it comes to gambling, and this is true for the suppliers to the casinos as well. Slot machine producer, International Game Technology (NYSE:IGT) has seen its games become favorite pastimes in China and new casinos are being built in Macau. Shares of IGT yield 1.4% and commands a nearly 50% market share in electronic casino gaming.
The Bottom Line
While socially responsible investing has its merits, investors adopting a pure moral portfolio maybe missing out some nice gains and dividends. Sin doesn't have to be evil. The preceding companies make wonderful additions to any portfolio, sin or otherwise. Investors feeling guilty can always donate their dividends to a charity of their choice. (Discover the issues that complicate these payouts for investors. See Dividend Facts You May Not Know.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: 10 Reasons To Add ETFs To Your Portfolio
Funds like the iShares KLD 400 Social Index (NYSE:DSI) or the FaithShares Catholic Values ETF (NYSE:FCV) have launched to take advantage of this new trend. After all, almost one out of every nine dollars in assets under management in the United States incorporated some sort of environment, sustainability and governance screen (ESG) as of 2007. However, investors strictly focusing their efforts on righteousness may be missing out on some good returns.
The Win in Sin
While SRI and ESG investing is experiencing a resurgence, those who align their portfolios on the other side of the fence have making all the profits. So called sin industries such alcohol, gambling, weapons and tobacco have outperformed their ethical counterparts. A recent report by Merrill Lynch which examined the performance of tobacco, alcohol and casino stocks during all of the recessions since 1970, found that while the broad S&P 500 fell by 1.5% on average, the sin sector rose by an average 11%. During the great tech meltdown, the broad market fell 20% between June of 2001 and 2002. However, during that time tobacco stocks gained 8% and gambling related stocks nearly 20%.
According to a study published in the Journal of Financial Economics, companies related to sin industries have produced yearly returns 3.5% higher than other stocks. In addition, institutional managers also own fewer shares of sin companies; owning only 23% of outstanding shares versus around 28% from firms such Clorox (NYSE:CLX). This causes sin industry stocks to trade at 15-20% discounts relative to their peers.
Finally, many sin stocks have strong balance sheets and steady free cash flow. Their "addictive" nature leads to steady returns, high dividends and a way to reduce portfolio volatility.
Investors willing to put morals aside may want to consider adding some sin to portfolio. Funds such as the USA Mutual's The Vice Fund (VICEX) or the Market Vectors Gaming ETF (NYSE:BJK) are good places to start a position in the sector, however larger dividends can be had if investors go it alone. Here are a few picks.
Selling cigarettes in almost every country in the world, British American Tobacco (NYSE:BTI) could be investors first stop for a global tobacco play. The firm receives the bulk of its revenue from faster growing emerging markets in Asia, Africa and the Middle East. The firm's global reach and exposure to the developing middle classes of the world has shares of the company trade at a slight premium to the other global tobacco play, Philip Morris International (NYSE:PM). British American yields 4.27%.
Brewer Molson Coors Brewing Company (NYSE:TAP) offers a higher dividend yield (currently 2.4%) than other producers in the sector such as Anheuser-Busch InBev (NYSE:BUD). Volume of beer sold has been declining in North America and the United Kingdom, but the stock is firmly in value territory, trading a P/E of around 10.
We all know that "the house always wins" when it comes to gambling, and this is true for the suppliers to the casinos as well. Slot machine producer, International Game Technology (NYSE:IGT) has seen its games become favorite pastimes in China and new casinos are being built in Macau. Shares of IGT yield 1.4% and commands a nearly 50% market share in electronic casino gaming.
The Bottom Line
While socially responsible investing has its merits, investors adopting a pure moral portfolio maybe missing out some nice gains and dividends. Sin doesn't have to be evil. The preceding companies make wonderful additions to any portfolio, sin or otherwise. Investors feeling guilty can always donate their dividends to a charity of their choice. (Discover the issues that complicate these payouts for investors. See Dividend Facts You May Not Know.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Aaron Levitt
Aaron Levitt is a SABEW investment journalist and analyst living in State College, Pennsylvania. His work appears in several high profile publications in both print and on the web. Aaron is a graduate of The Pennsylvania State University where he studied Economics and International Business and he is an advocate for long-term investing with a global framework. You can follow his picks and pans at @AaronLevitt
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