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Sin Stocks: Should You Invest in Them?

Learn what are sin stocks, including the types of companies and industries that are associated with vices and activities that are often considered unethical.

Investing in stocks is a popular way for people to try to grow their savings.

If you buy shares in successful businesses, those shares can appreciate in value and often pay dividends that shareholders can use to buy other investments or to pay for living expenses.

Some people choose to invest in a group of companies called sin stocks.

These businesses’ shares are called sin stocks because they’re generally associated with vices or activities that some or many consider unethical or immoral.

Some investors feel that sin stocks are uniquely positioned to maintain their value and continue to grow while others prefer to avoid sin stocks because of the way they operate.

Types of Sin Stocks

There are many different types of sin stocks.

Typically, companies that operate in industries considered immoral or unethical are grouped together as sin stocks.

Examples of industries included under the sin stock moniker include:

  • Alcohol
  • Gambling
  • Tobacco
  • Sex
  • Weapons and the military
  • Fossil fuels

For example, AB InBev, the company that produces Budweiser and other alcoholic beverages would be considered a sin stock. Altria Group is a company behind many tobacco products.

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Whether a stock qualifies as a sin stock can be up for debate.

Some companies may have some activities that some investors consider unethical while having other parts of their business that are non-issues.

For example, Boeing makes many commercial passenger and shipping aircraft but also supplies weapons to the U.S. military, which some investors may think is enough to qualify the company as a sin stock.

Why Invest in Sin Stocks?

Proponents of sin stocks argue that there are many reasons to invest in them.

More likely to survive recessions

One reason is that many sin stocks involve vices or addictions which create many return customers.

This gives companies in these industries a better chance of weathering recessions.

For example, tobacco companies largely profit from consumers who are addicted to nicotine. Smokers are more likely to cut expenses elsewhere than to give up smoking during hard economic times, which means that these companies can expect to maintain revenues during a recession.

Barrier against competition

Another is that due to societal pressure or regulation, it can be difficult for new businesses to enter the market.

In the United States, gambling is heavily regulated, with many states holding a monopoly on gambling or limiting the number of casinos that operate. Existing companies in the gambling industry have a major advantage because these regulations make it difficult for new players to enter the market.

Some sin stock investors also argue that sin stocks tend to be undervalued.

The argument is that their reputation leads to some investors and financial managers avoiding them, which artificially depresses their prices.

Cons

Investing in stocks does have a number of drawbacks worth considering.

One is that they have a far higher political risk than companies in other industries.

Consider the change in society’s treatment of smoking over the past decades. Smoking tobacco is much less socially acceptable and governments have banned people from smoking in buildings other public areas. This has helped reduce the prevalence of smoking, which can damage tobacco companies’ profits.

More recently, vaping has become a common concern amongst politicians and public health experts and new regulations could severely hamper the growth of companies that focus on vape products.

Prohibition is an extreme example of the political risk facing sin stocks. During Prohibition, all alcohol was banned in the U.S. If something similar were to happen to an industry related to sin stocks, the companies could be forced out of business.

Subject to additional taxes

A less extreme example is a sin tax, which adds additional costs to these products.

For example, many states levy additional taxes on everything cigarettes to sugary drinks. This drives up their costs which can reduce consumption, thereby reducing companies’ revenues.

The Opposite: ESG Investing

Some people want to avoid investing in sin stocks out of a feeling of ethical or moral obligation. These investors might want to consider Environmental, Social, and Governance (ESG) Investing.

ESG Investing means investing in companies based on their commitment to certain values relating to the environment, society, and company governance.

For example, an ESG investor might look for companies that produce green energy or that actively work to mitigate their negative impact on the environment. They could also look for stocks that commit to ethical business practices, promoting diversity on their board of directors, following labor and safety standards, and creating a positive impact in their communities.

Proponents of ESG investing argue that these companies will outperform others because consumers care about how a company impacts society and will reward those businesses that have a positive impact.

Detractors argue that ESG investing has no impact on returns or even has a negative impact because these businesses waste effort and resources on things that don’t affect their bottom line.

How to Buy Sin or ESG Stocks

If you want to start investing, whether you’re considering buying sin stocks or following an ESG investing strategy, remember that due diligence is important.

Before investing, you should research the different companies to make sure they fit with your personal and investing goals.

Once you’ve done your research and are ready to get started, there are a few ways to invest.

Buy individual shares in a brokerage account

The first thing that you’ll need to do is open a brokerage account. A brokerage account lets you buy and sell investments, so you’ll need one regardless of how you plan to invest in sin or ESG stocks.

Once you’ve opened your brokerage account, you can transfer funds from your bank. 

After the brokerage account is set up, you can place buy orders to purchase shares of any particular stock.

Keep in mind that buying shares in just one or a few companies can be risky because your portfolio won’t be very diversified. If one company performs poorly it can have a big impact on your portfolio.

Use mutual funds and ETFs

Another option for investing in sin stocks or ESG stocks is to invest in mutual funds and ETFs that focus on that type of company.

Many mutual fund providers have funds that focus on sin stocks or ESG stocks. You can buy shares in the fund to instantly get exposure to dozens or hundreds of different companies. This makes it easy to diversify your portfolio, even if you have a limited amount to invest.

Many brokerages operate their own funds, so if you find a fund you like, it could influence the brokerage you choose to work with when opening your account.

Keep in mind:

Mutual funds and ETFs usually impose a fee, called an expense ratio, for their services. These fees can eat into your returns over time, so look for a fund that charges a low fee.

Conclusion

Sin stocks are a popular choice among investors because they’re perceived as more resilient in volatile and uncertain markets.

However, many investors think that socially responsible businesses have a very bright future, leading them to focus on ESG investing.