Tuesday, August 30, 2005

Sin Stocks!!

I wanted to talk about something that I have been thinking about for quite some time now. Specifically, the question I ask myself is, "Should I invest in 'sin' stocks - specifically tobacco stocks?"

Let me start off by saying that I am in no way a straight-laced preachy type of guy. I believe that people have the choice to do whatever they wish (legal, of course). This post is just a representation of some of my analysis I did to decide on the course of action I use within my own portfolio.

There can be a big appeal to investing in stocks that focus on people's vices. The example that might come to most people's minds would be smoking. Altria, who controls Philip Morris International and Philip Morris USA, manufactures seven of the top 20 global tobacco products. Altria pays a very good dividend - currently at 4.2% - but I have seen it as high a 6%. In addition, the company seems pretty cheap against the market with a low P/E ratio. The high dividend yield is the premium that investors seem to expect as a result of investing in a risky stock that either through government regulation or huge lawsuit settlements can quickly alter the course of the company.

I must admit, this nice dividend payment would be a great addition to my portfolio and my $300,000 goal. I also believe that the company will do well into the future. They have been sued many times for billions of dollars and are still able to make shareowners happy. However, each time I think about buying it, a shred of guilt emerges inside of me that has me questioning whether I want to invest in a company that knowingly manufactures an addictive product that has been linked to a high number of deaths. In addition, I think about all the young kids I see smoking and it upsets me that they seem to think it is 'cool' to light up.

As a result of all this thinking I always end up not making a purchase. I just can't bring myself to do it. Even through all the numbers look stable and the payout is wonderful, I stay away. It amazes me too, because I try to keep my emotions out of my investing as it has burned me before.

Again, I am not suggesting that you should not own 'sin' stocks. In fact, if all the analysis looked good, I probably would buy a liquor stock or a gambling stock. You may think differently. Just be sure you are comfortable with your decision on an emotional level. It won't be fun owning a stock that makes you feel guilty!

P.S. I ran across a mutual fund that invests in what they call 'vice' stocks. It is called the Vice Fund and is run by Mutual.com. Interesting stuff.

7 Comments:

Blogger Ken said...

Altria might not be a bad play right now. There's talk of splitting the company into three divisions - Philip Morris US, Philip Morris International and Kraft - to shield it from lawsuits.

Also, if you want Canadian there's also Rothmans. They have raised their dividend recently and they also gave out $1.50 a share in special dividends.

Cheers,

Ken
Canadian Dividend Reinvestment Plans (DRIPs)

8/31/2005 07:00:00 AM  
Blogger Baltica said...

I've found investing in the tobacco industry easier to justify when I take a step back and look at the big picture.

Smokers cause a greater burden on our health care system which non-smokers like me have to help pay for through taxes. Part of that money I pay can be replaced by the smokers themselves if I choose to invest in a tobacco company and receive a portion of their profit by way of dividends and/or capital gains.

Okay, maybe that's a bit of a stretch. It goes to show you that you can justify pretty much anything if you really wanted to.

Keep up the great work on this blog. It's a treat to check it out from time to time to see what similar types of investors to myself are up to.

8/31/2005 06:50:00 PM  
Blogger Canadian Capitalist said...

Great topic. The first sin stock I bought was Altria, when it was in deep trouble over the Price $10B verdict. I thought long and hard about the ethics of investing in sin and decided that personally I would invest in anything legal. It is funny that I was squeamish about big tobacco, but had no problem investing in resources (environmental damage) and aerospace (military).

I personally own Altria and Anheuser-Busch. I don't believe Altria is a good value now relative to its litigation risks. Good luck with your decision.

Canadian Capitalist

9/01/2005 04:12:00 PM  
Blogger The Dividend Guy said...

That is a good point Canadian Capitalist concerning the resource stocks. As a Calgarian, oil and gas is in my blood and I would not hesitate to buy an Encana or Enbridge. Never thought about it that way.

9/01/2005 09:44:00 PM  
Blogger The Dividend Guy said...

Baltica, you are right about being able to justify anything...just depends at how good at debate you are!! Part of my issue with tobacco stocks is the burden they place on the health care system. I am not sure I am really getting my money back, but I appreciate your viewpoint none the less.

9/01/2005 09:47:00 PM  
Anonymous beverly said...

Interesting ... I just had the same conversation about "vice stocks" with my friend over coffee a couple of days ago. I don't consider myself righteous, but smoking hits such a chord with me, that I know I couldn't invest.

What a great blog ... I'll be back ... :)

9/12/2005 09:50:00 PM  
Blogger Caitlin said...

great post...it really does come down to a personal choice. For me, even though I'd be reaping a dividend, investing in something almost seems like an implicit show of support for a company. And tobacco marketing techniques just cross that line for me and I wouldn't want to feel i was supporting that in any way. so my personal choice would be to avoid....

just good thought provoking stuff! :)

9/17/2005 08:44:00 AM  

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