A Vice Stock So Good You’ll Want To Sin
One of my early mentors told me, “What do people do to celebrate good times? Drink, smoke, gamble and have sex. And what do they do during recessions? Drink, smoke, gamble and have sex.”
He was teaching me about the advantages of so-called “sin” stocks — and the fantastic profits that they produce no matter the market climate.
What are sin stocks? The definition varies on who you talk to, but sin stocks offer products/services that are considered inappropriate or harmful to society, such as:
A study commissioned by Fidelity found that one out of eight investors owns a “sin” stock.
Of course, just because someone invests in sin stocks doesn’t mean that they necessarily endorse sinful behavior.
What investors endorse are stock market profits, and sin stocks have generally been fantastic investments.
The Rationale for Vice Investing
A business is ultimately valued on its ability to generate profits, and sin stocks enjoy steady demand and strong pricing power that produces high profit margins.
According to a study from the London School of Business:
The rationale for “vice” investing is that these companies have a steady demand for their goods and services regardless of economic conditions, they operate globally, they tend to be high-margin businesses and they are in industries with high entry barriers.
With that said, it’s important to note in today’s market not all sin stocks are created equal.
In fact, some of the traditional sin industries are struggling. The number of smokers in the U.S. has been falling for decades, and the casino industry is struggling from a profit-crushing oversupply of new casinos.
The alcohol industry, however, has been growing like a weed as the global economic recovery has created hundreds of millions of new middle-class consumers all over the world.
In addition to being somewhat insulated from the cyclical nature of the economy, many sin stocks pay handsome dividends.
Including the company I want to talk about today.
Infinite Income Made Easy
You know the brands.
Johnnie Walker, Ketel One, Oban, Lagavulin, and Guinness, among many others.
But do you know who brings these brands to your corner market?
Odds are you appreciate this company’s work… And know little, if anything about Diageo PLC (NASDAQ: DEO).
DEO is a British multinational beverage company, headquartered in London, England.
It’s the world’s second largest distiller behind Chinese distiller Moutai.
According to Diageo’s website they have over 200 brands, sold in 180 countries at almost every price point.
As for the stock, it’s on a tear the last 12 months. Here’s the past year for long-range perspective:
DEO’s up 19.5% over the past year.
Currently, the stock is trading at roughly 6% above their 200-day moving average, but is close to on par with its 50-day moving average of $141.70.
It’s possible the stock is a bit overvalued right now. But it’s also possible we’re in the middle of a prolonged run.
The former is more likely, but the latter is far from a stretch.
That said it may be worth waiting for an inversion before acting. For the long term however, DEO looks like a winner.
They boast a strong chart and booze is an all-weather business. Even more enticing is DEO stock pays a dividend of $2.78 a year, good for a 1.88% yield.
That means free money just for holding the stock, whether it goes up or down in share value.
And if it goes up you’re booking double-dipped profits the easy way.
A dream scenario for those seeking easy extra income.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch