Is Sinful Investing the Right Move for You?

If you are a staunch supporter of socially responsible investing, you may find the content of this article difficult to comprehend. Investing in “green” companies has a number of distinct advantages. However, if there is one aspect of society that has stood the test of time, it is the concept of sin. And, believe it or not, there are investors who have discovered a way to make money by investing in pornographic stocks.

The Most Important Takeaways

  • The stocks of sinful companies such as pornographic companies, gambling companies, and tobacco companies present investors with a difficult but potentially lucrative set of choices.
  • Despite the fact that some people may have ethical concerns about investing in sinful stocks, the returns provided by these companies are often less vulnerable to economic downturns than other types of investments.
  • It has even become easier for you to invest in sinful companies and benefit from immediate diversification in the industry thanks to ETF companies.
  • Sin stocks tend to be systematically undervalued because so many investors avoid them as a result of this decision.
  • However, while demand for products such as tobacco and alcohol is unquestionably stable, sin stocks are subject to higher levels of regulatory and taxation risk than the average company.

What Is the Definition of Sinful Investing?

In the financial world, sinful stock refers to stock issued by a company that is associated with (or directly involved in) activities that are considered unethical or immoral.

The problem with ethics and morality, on the other hand, is that there is no universally accepted definition of what constitutes or does not constitute ethical or moral behavior. In the case of certain advertising campaigns, for example, one investor may consider them unethical and label the product or the advertising company itself as a sinful investment opportunity. Another investor may not see any ethical compromise in the current situation, and vice versa. When it comes to discussing sinful investing, there is some ambiguity in defining what constitutes a sinful stock.

While there are some sectors of the economy that are generally considered sinful, these include the gambling, alcohol, tobacco, sex, and defense industries, to name a few examples. We will look at some of these so-called sinful industries in greater detail below.

Stocks that are used for gambling

A single visit to Las Vegas or Atlantic City will provide ample evidence of the enormous scale of the gambling industry. It is possible to find numerous casino operators with market capitalizations in the billions of dollars just in the Las Vegas area.

In addition to the casino and hotel operators, there is the less glamorous side of the business, which is the upkeep of the hardware that allows the casinos to stay open. In addition, racetrack operators and sports betting companies are included in this industry.

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 (PDYPF) and DraftKings (DK) are among the most valuable gambling stocks (DKNG).

One thing is certain: gambling will not be phased out any time in the foreseeable future. In fact, the popularity of gambling has increased in recent years, thanks to the proliferation of online venues for placing wagers.

Stocks of alcoholic beverages

Beer, wine, and spirits have all been profitable for hundreds of years, and companies have taken advantage of this fact for years. While the vast majority of vineyards are privately owned, there are a number of breweries and distilleries that are traded on the stock exchange.

Wine stocks, beer stocks, and liquor companies are all available to those who are interested in learning more about them. What’s the best part? These stocks have the potential to outperform the market in terms of earnings.

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In the year ending on May 22, 2021, diversified alcohol giants Anheuser-Busch InBev SA/NV (BUD), Constellation Brands (STZ), and Diageo (DEO) have seen their stock prices rise by an average of 87 percent1, 41 percent2, and 33 percent3, respectively.

Stocks in the tobacco industry

While the tobacco industry has experienced a firestorm of class-action lawsuits since 2000 and billions of dollars in settlement payments, the tobacco and cigarette industries have maintained their profitability.

Despite the fact that smoking has become less popular in North America, the rest of the world continues to inhale cigarettes. For the foreseeable future, tobacco products will continue to enjoy large markets.

Cigarette giants Altria (MO) and Philip Morris International (PM) returned 42 percent 4 and 45 percent 5, respectively, over the past year; this is despite the fact that the world is once again in the midst of a major epidemic.

The King of Dividends

Altria has increased its dividend for a record-breaking 51 consecutive years as of the time of this writing (May 2021).

The Market Price of Sin Stocks

Stocks in the sex industry

Because the sex industry is so large, and because much of it operates underground, it is difficult to obtain precise industry statistics. A number of companies in the pornography industry, condom manufacturing, and even makers of drugs designed to enhance a sexual experience have gone public in recent years, but this is not the first time.

The Internet, much like gambling, has opened up a whole new world of possibilities for this industry. Despite the fact that it is a taboo subject, there are companies that are making a lot of money selling pornography on the Internet (though most of these firms are not publicly traded).

Without taking into consideration the more visible and brazen operators such as Playboy and Hustler, there are a great many more innocuous industries that benefit from the sale of sex, such as hotels and cable operators who earn handsome sums from their pay-per-view movies.

RCI Hospitality Holdings is the best publicly traded example of a sex stock currently available on the market (RICK). Affluent adult nightclubs such as Rick’s Cabaret, Jaguar’s Club, Tootsie’s Cabaret, and XTC Cabaret are owned and operated by the company, among others.

Stocks in the Defense Industry

Despite the fact that the defense industry falls into one of those gray areas that we discussed earlier, these stocks are generally considered to be sinful in most circles.

It is possible to interpret the production of missiles, guns, tanks, and fighter jets in a number of different ways. Either you believe it is destructive and harmful to the entire human race, as well as those living in the country where the arms are destined, or you believe it is simply a proactive measure for the protection of one’s own country and its citizens.

It does not matter what your ethical or moral stance is on the issue; there is no debate about how profitable it is for companies to manufacture, sell, and distribute military-related equipment. Lockheed Martin is an example of a defense company that has a stock (LMT).

Returns that are simply too good to pass up

Sectors that entice us with “naughty” temptations can be a good place to put a portion of your portfolio. First and foremost, these companies provide investors with relatively stable returns, both during good times and during bad.

According to an old proverb, “What do you do to commemorate happy occasions? Drink, smoke, gamble, and have sex are all acceptable activities.” And what do many people do when they are under stress or in a recession? “Drink, smoke, gamble, and engage in sexual activity.”

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It is often the case that the returns provided by the companies involved in these activities are less susceptible to cyclical downturns in the economy. It is possible to earn respectable returns during times of prosperity while also earning welcome returns during times of market and economic downturn.

In addition to being somewhat immune to the cyclical nature of the economy, many sin stocks are well-known for paying out dividends on a consistent basis..

What Motivates You to Do It?

The simplest answer is that investment returns are important. A large number of businesses in these industries have consistently generated a healthy profit and will continue to do so in the foreseeable future. Avoiding all of the companies within these industries could result in your portfolio’s ability to generate some significant gains being restricted. Given that many of these businesses are based on addiction, it’s easy to see why.

Gambling, tobacco, and alcohol are all examples of products or activities that are habit-forming. The morality argument comes into play at this point. Few would argue that people who smoke cigarettes or gamble frequently are extremely loyal customers. Is it, however, ethical to continue to accept a gambler’s money despite the fact that they have a serious problem? What do you think about selling beer to a recovering alcoholic? Clearly, there are no easy answers in this situation, and each investor must make their own decision on this matter.

While we would not recommend that a portfolio be comprised solely of sinful stocks, including a portion of them in a well-balanced portfolio is something to think about. The same as in any industry, there will be companies that outperform their competitors, and by no means will all stocks associated with these types of businesses be profitable. You will still need to do your research in order to select the best candidates.

What is the best way to invest?

It has even become easier for you to invest in sinful companies and benefit from immediate diversification in the industry thanks to ETF companies. Issuers such as Invesco, VanEck, ETFMG, and AdvisorShares all offer exchange-traded funds (ETFs) that invest in this manner; this is a socially responsible investor’s worst nightmare.

Consider the AdvisorShares Vice ETF, which is a mutual fund that invests in the vice sector (VICE). This exchange-traded fund (ETF) seeks long-term growth by investing in “vice” companies, such as those engaged in the sale of alcoholic beverages, tobacco products, gaming, and other vice-related activities, among others. Many large companies, such as The Boston Beer Company, Turtle Beach (HEAR), and Jack in the Box, are held by the fund (JACK).

If marijuana is your sinful stock of choice, the ETMFMG Alternative Harvest ETF may be of interest (MJ). We follow the Prime Alternative Harvest Index, which is designed to measure the performance of companies in both the global medicinal and recreational cannabis industries, according to MJ. Tilray (TLRY), Canopy Growth (CGC), and Cronos Group (CRON) are among the company’s top holdings (CRON).

The VanEck Vectors Gaming ETF (BJK) is another simple way to get started in the sin industry. The MVIS Global Gaming Index, which is an index designed to track the overall performance of companies involved in casinos, sports betting, lottery services, gaming services, and gaming technology, is the benchmark against which this ETF is designed to track the performance. Las Vegas Sands, Caesars Entertainment, MGM Resorts, and DraftKings are just a few of the companies that make up the ETF’s top holdings.

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For those looking for a little bit more diversification, the Invesco Dynamic Leisure and Entertainment ETF may be a good option for them (PEJ). PEJ is based on the Dynamic Leisure and Entertainment Index, which is comprised of 30 companies based in the United States that are involved in the leisure and entertainment industries, according to the PEJ website. A number of the ETF’s holdings are in the gambling industry, including Churchill Downs (CHDN), Penn National Gaming (PENN), and Boyd Gaming Corporation (BYD). Consequently, while PEJ isn’t exactly a “pure” play on sinful investing, it still allows you to gain some exposure to vice-based businesses while maintaining a healthy level of diversification.

Investors now have access to diversification and professional management within the tobacco, gambling, alcohol, defense, and sex industries, in the same way that ETF families may offer a technology fund or an energy fund, among other things.

You can be certain that a socially conscious investor would never even consider participating in these types of investments in the first place. However, for some, investing is nothing more than the process of identifying businesses that will stand the test of time and generate significant profits.

If, on the other hand, you believe a company does not meet your social standards, you should speak up with your dollars and refrain from investing in them.

Sin Stocks Have Both Advantages and Disadvantages

Investing in sin stocks has a number of advantages over other investments. As we’ve discussed, the most significant advantage that they can provide is the upside potential that they are able to provide regardless of whether the overall market is rising or declining. In comparison to more cyclical businesses, sin stocks are significantly more resistant to economic shocks.

Let’s face it: people drink, smoke, gamble, and engage in sexual activity in both good and bad times.

Sin stocks reap the benefits of monopolistic returns as well. Because industries such as tobacco, alcohol, and gambling are heavily regulated, the big corporations that have already established themselves in the space often face little competition.

Market-beating returns can be achieved by investing in sin stocks, which are further enhanced by their historical stability. That’s the best of both worlds in my opinion.

Sin stocks also have the advantage of being underpriced on a consistent basis, which is another advantage. For lack of a better term, you can usually find them at “bargain” prices. Because sin stocks are associated with such a negative reputation, many investors continue to avoid them. Another advantage is that it provides other investors the opportunity to acquire them at low risk-adjusted prices.

It goes without saying that there are some drawbacks to investing in sin stocks. However, while demand for products such as tobacco and alcohol is unquestionably stable, sin stocks are subject to higher levels of regulatory and taxation risk than the average company. The fact that these industries are associated with so many ethical dilemmas makes them particularly vulnerable to shifts in national and political opinion.

What’s the bottom line?

Whatever your position on sinful investing, it is important to remember that human weaknesses and the allure of sinful pleasures are unlikely to go away anytime soon. If you have a long-term perspective and are looking for a little excitement, consider including a small amount of peccadillo in your portfolio. You might even want to look into the history of sinful investing to gain even more insight.

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