Sin stocks, anyone?

Owning sin stocks may be immoral or unethical. But do investors really care if they pay good money?

“This urge to make money out of people’s addictions I find quite sick”

“Why are you promoting cannabis investment. Do you not feel a sense of responsibility for the horrendous potential effects on people’s health”

I take it investing in cannabis isn’t for everyone…

Horrified, I asked editor Sean Keyes, who’s extensively researched this industry, if he felt any pangs of conscience. But Sean sleeps like a baby:

“I’m a soft libertarian. I think that for the government to ban a substance, I think it needs to be nasty and addictive.

“Pot doesn’t pass the threshold. It’s minimally addictive and, while it’s not harmless, it doesn’t do nearly as much harm as substances like cigarettes or alcohol.

“Therefore I believe free people should have the right to choose whether to use cannabis. I think the cost of prohibition is higher than the cost of legalisation.

“It’s effectively legal in much of North America, where society is still functioning as normal. And that’s before we even get to the medicinal benefits of it.”

Like it or not, there is a debate going on about making cannabis use legal. It makes its actual legalisation more likely and this will throw up investment ideas.

There’s a rising tide of medical marijuana stocks and investors stand to make big gains.

What about other so-called “sin stocks”? Let’s have a look at what they are and why investors like them.

What is a sin stock?

Sin stocks are a bit of minefield, but let’s try to navigate that nonetheless.

What is a “sin stock” anyway?

Well, they’re stocks in listed companies which make their money off something that’s considered unethical or immoral.

The problem already lies right there in the definition. We don’t all carry the same ethics rulebook. One man’s terrorist is another man’s freedom fighter as they say.

Classic examples of sin stock industries are alcohol, tobacco, gambling, and arms manufacturers.

Pretty clear, right? Alcohol and tobacco harm your health, gambling is highly addictive and arms manufacturers prey on war. That’s all pretty bad stuff.

But hold on. Many people enjoy a drink from time to time and so they won’t find alcohol stocks particularly sinful. And while some wouldn’t want to back military contractors, others may find it patriotic to do so.

What if you’re deeply passionate about the environment? Then you probably don’t want to invest in BP after it coloured the Gulf of Mexico black with oil. And there’s a good chance you don’t like Volkswagen either after its emission scandal.

Judging from the emails we’ve received, there are clearly people who think we should add cannabis investments to the list of sin stocks. One reader wrote in to say that cannabis use can cause paranoia and psychotic episodes.

Research on the impact of cannabis on mental health issues is divided. For some people it seems to alleviate their problems, for others it exacerbates them.

At the same time studies are saying cannabis could stop cancer spreading and boost the immune system. If you accept those studies then the case for medical cannabis may not be unethical.

I’m not a scientist so I don’t care to weigh in. What I can say is that the label “sin stocks” doesn’t seem to stop a lot of people investing in them.

As Ralph Waldo Emerson once observed, “a man is usually more careful of his money than he is of his principles.”

It pays to sin

What falls into the category sin stocks is, as everything, a little subjective. People usually don’t find it such a problem to invest in sin stocks as long as they pay.

And pay they do.

Sin stocks tend to be sound investments. They’re companies with a steady stream of customers and tough regulation limits competition in these industries.

Even if their clientele decreases they seem to make it work.

Take tobacco. Even though cigarette sales fell by 37% between 2001 and 2016, revenue went up 32%. That’s because the price of cigs increased 70% over the same period.

Indeed, of all the sin stocks tobacco companies truly have a track record to boast of.

CNN named cigarette company Altria “America’s most successful stock” back in 2015. It had an annual return of 20.6% per year for nearly 50 years. No other stock even came close to that.

And Altria’s not an isolated case.

“For 118 years, tobacco stocks have been among the best-performing stocks on US and global stock markets,” Sean Keyes wrote back in April.

“The level of outperformance is just ridiculous. [R]esearch showed $1 invested in the US market in 1900 would be worth $38,000 today. $1 invested in tobacco stocks would be worth $6,300,000.”

Cigarette companies are now actually going through a bit of a rough patch. Disappointing figures have caused many investors to sell out of Altria and Philip Morris this year. It’s ended arguably the greatest bull market in history.

But if you’re an income investor then you could still do a lot worse than tobacco. Imperial Brands has a forecast dividend yield of 6.6% while British American Tobacco is on 5.1%. That’s nothing to sniff at.

The emerging cannabis industry could throw up some great investments. I appreciate investing in this industry is not going to be for everyone, so you should always invest according to your own conscience.

Unless, of course, the devil offers you a great deal in exchange for your soul.

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