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Many people who invest in the stock market find it easiest to invest in the industries they know and use. And, more and more investors have started to take into account environmental, social and governance factors before investing in a company. Indeed, global responsible investing reached $495.82 billion in 2023, up 17% over the previous year, according to the Global Sustainable Investment Alliance. And Bloomberg predicts that global ESG assets may top $53 trillion by 2025.
ESG investing means focusing on a company's environmental, social, and governance score before you invest money. ESG investors exclude so-called “sin stocks,” a moniker given to publicly traded companies involved in unethical sectors such as casinos, adult entertainment, cannabis, alcohol, tobacco, or gambling, especially in mutual funds. As you can tell, investing in sin industries is the polar opposite of sustainable investing.
But last year, sin stocks, or vice stocks, had higher returns and historically have outperformed the market. Do you add sin stocks to your portfolio and earn money on unethical areas, or keep away and let ethics win? That’s up to you. Here, we examine the pros and cons.
In this article
What is a sin stock
As noted, companies involved in alcohol, gambling, tobacco, and firearm manufacturers are all sin stocks. However, regional and societal influences come into play as well. For example, military service is widely considered a form of patriotism, yet weapon makers are considered sin stocks. Similarly, brewing beer is considered a noble profession in many parts of the world, even prestigious, but alcohol-making is added to the basket of sin companies.
The definition of sin stocks varies from one person to another because it depends on how they feel about a particular industry. Some even consider McDonald’s a sin stock because of its alleged role in aiding obesity. Someone passionate about the environment may call oil and coal companies sin stocks.
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Benefits of investing in sin stocks
Sin stocks are considered a great addition to your portfolio for several reasons.
Recession-proof. People will continue to consume alcohol or smoke cigarettes no matter the economy. In fact, retail alcohol sales are expected to grow 4% between 2024 and 2028, and cigarette sales 3% in the same time period.
Stable returns. Sin stocks have considerable social and regulatory risks. Institutional investors must also consider the reputational risk before investing in these companies. But because these risks discourage potential competitors from entering, sin stocks generally enjoy stable returns and solid cash flows.
Underpriced. Because of the stigma surrounding sin stocks, many investors avoid them and instead look elsewhere to deploy capital. But this allows others to invest in them at bargain prices.
Dividends. Many of these sin companies are dividend stocks, meaning they regularly pay dividends. These payouts are a great way to earn passive income on top of any price appreciation in the stock. Altria Group, British American Tobacco, and Anheuser-Busch InBev all boast a high dividend yield within the sin industry.
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How to invest in sin stocks
The easiest way to buy sin companies is to invest directly through your brokerage account. Of course, this puts you in the driver's seat as you will be responsible for each aspect of investing.
Alternatively, you can also invest in sin stocks through ETFs. The AdvisorShares Vice ETF invests in alcohol, tobacco, and gaming companies; ETMFMG Alternative Harvest ETF lets you invest in marijuana stocks; VanEck Vectors Gaming ETF will let you invest in casinos, and Invesco Dynamic Leisure and Entertainment ETF are focused on the leisure and entertainment industries.
Popular sin stocks
Altria Group
Altria is one of the world's largest producers of tobacco and cigarettes. It also owns Philip Morris and has stakes in Anheuser-Busch InBev, Juul, and Cronos. But the company is now looking to move beyond smoking. To that end, it has developed a website to help people quit smoking and aims to deliver a "compelling portfolio" of smoke-free products like smokeless tobacco and nicotine pouches. According to Sustainalytics, it has an ESG risk score of 25 (medium).
British American Tobacco
As the name suggests, the company manufactures and sells cigarettes and tobacco products and has had its fair share of controversies. It has been accused of trying to market and sell its products in impoverished countries and ignoring the cancer risks posed by cigarettes as far back as 1958. And just like Altria, BAT is "reducing the health impact of our business" by "creating new products, backed by science." It has Sustainalytics' ESG risk rating of 26.8 (medium).
Caesars Entertainment
Caesars is a casino entertainment company, and its 2015 bankruptcy, under the weight of $24 billion in debt, spawned a corporate brawl between the company and its private equity owners. In April 2020, the company was fined $16 million by the U.K. Gambling Commission for failing to prevent money laundering and allowing problem gamblers to keep wagering. Its ESG risk rating is 23.4 (medium), according to Sustainalytics.
Smith & Wesson
Does the Smith & Wesson AR-15 style rifle ring a bell? It was been used in the 2018 Stoneman Douglas High School shooting, the 2015 San Bernardino attack, and the 2012 Aurora, Colorado shooting. The company sees public outcry and increased scrutiny after mass shootings. Sustainalytics assigned its ESG risk rating at 19.2 (low).
Las Vegas Sands
A casino and resort company, Las Vegas Sands poured $52.9 million to Republicans during the 2012 election cycle, becoming the largest single contributor to federal campaigns. Florida is investigating the company for allegedly collecting fraudulent signatures as part of a drive to expand casino gambling. At 17.7 (low), its ESG risk rating is the lowest on this list, according to Sustainalytics.
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Pros and cons
Pros
- Sin stocks offer stable returns.
- Sin companies often boast a high dividend yield.
- Sin stocks are less prone to economic downturns.
Cons
- Different people have different definitions of sin stocks.
- Investing in sin stocks carries significant regulatory risk.
- Sin companies may be at the receiving end of high taxes.
FAQs
What's the difference between ESG and sin stock investing?
ESG investing looks at how well a company scores on issues related to environment, social and governance. Sin stocks are companies operating in sectors considered unethical or immoral. The two are polar opposites.
How can I invest in sin stocks?
The easiest way is to buy these companies directly through your brokerage account, but you can also invest via ETFs.
What are some of the risks to consider before investing in sin stocks?
There's regulatory and reputational risk to consider, especially for institutional investors. Sin stocks may see higher taxes if states decide to fatten their coffers.
The bottom line
Sin stocks attract a lot of scorn and disdain, and a few sin companies, especially tobacco stocks, are looking to shed their image of yore. Everyone has their own notion of what counts as a sin. Everyone's investment strategy is to generate stable returns, which sin stocks provide. But they also carry regulatory and reputational risks. Virtuous and ethical investments exist, but this space is worth checking out if you don't have a problem sinning.
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Writer
Jasir Jawaid is Joy Wallet's Assistant Editor. He has more than 13 years of experience as a journalist covering Wall Street, equities, financial policy and regulation, and cryptocurrency and blockchain.
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