Winning With Sin Stocks
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.
Now, I am looking at another sin stock in a completely different industry — one that is going to be around for a very long time.
Sin stocks offer products/services that are considered inappropriate or harmful to society, such as:
Of course, just because someone invests in sin stocks doesn’t mean that they necessarily endorse sinful behavior or support the ethics and morals of that company’s industry.
Investors couldn’t care less about all of that nonsense…
What investors want are stock market profits, and sin stocks have generally been fantastic investments.
Today, I want to focus on one “sin sector”: alcohol.
And I want to show you one of my favorite plays in this space. But first, allow me to show you why sin stocks can be great 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 Business School, “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.
In Your Bar… Why Not Your Portfolio?
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 (NYSE: DEO).
DEO is a British multinational beverage company headquartered in London, England.
It’s the world’s second-largest distiller, behind Chinese distiller Kweichow 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 been on a tear this year, up 20%. Here’s the past year for long-range perspective:
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.
It boasts a strong chart, and booze is an all-weather business. Even more enticing is DEO stock pays a dividend of $2.71 a year, good for a 1.62% yield.
Add on seven years of dividend growth and 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