Sinful Investing: Is It for You? (2024)

If you are a strong proponent of socially responsible investing, you may find this article hard to fathom. There are definite advantages to investing in "clean" companies. But if there is one aspect of society that has endured the test of time: sin. And believe it or not, there are investors who have found ways to invest in p*rn stocks.

What Is Sinful Investing?

Sinful stock is stock from a company that is associated with (or is directly involved in) activities considered unethical or immoral.

The thing with ethics and morality, however, is that there is no universally accepted definition of what is or what is not ethical or moral. For example, one investor may view certain advertising campaigns as unethical and brand the product or the ad company itself as a sinful investment. Another investor may see no ethical compromise in thesituation. In discussing sinful investing, there is some gray area in defining a stock as sinful.

However, there are some sectors of the economy that are generally considered sinful, such as the gambling, alcohol, tobacco, sex, and defense industries. Below we explore some of these so-called sinful industries.

Gambling Stocks

Just one trip to Las Vegas or Atlantic City will show you the huge size of the gambling industry. In Vegas alone, there are numerous casino operators with market capitalizations in the multibillion-dollar range.

In addition to the casino and hotel operators, there is the less sexy end of the business; maintaining the hardware to keep the casinos full. The industry also encompasses racetrack operators and sports betting companies.

Some of the biggest gambling stocks include casino operators such as Las Vegas Sands (LVS), MGM Resorts (MGM), and Caesars Entertainment (CZR), as well as fantasy sports operators such as Flutter Entertainment (PDYPF) and DraftKings (DKNG).

One thing is clear: gambling is not going away anytime soon. If anything, gambling's popularity has soared in recent years with more and more online options for placing bets.

Alcohol Stocks

The profitability of beer, wine,and spirits has been something that companies have been capitalizing on for hundreds of years. While the majority of vineyards are private, there are plenty of brewers and distillers that are publicly traded.

Curious investors can invest in a wide variety of wine stocks, beer stocks, and liquor companies. The best part? These stocks have the potential to provide market-topping returns.

As of May 22, 2021, diversified alcohol giants Anheuser-Busch InBev SA/NV (BUD), Constellation Brands (STZ), and Diageo (DEO) are up 87%, 41%, and 33%, respectively, over the past year.

Tobacco Stocks

Despite a firestorm of class-action lawsuits at the end of the millennium and the billions of dollars spent in settlement payouts, tobacco and cigarette companies remain profitable.

Even if smoking has become less vogue in North America, the rest of the world continues to puff away. Huge markets remain for tobacco products for the foreseeable future.

For example, cigarette giants Altria (MO) and Philip Morris International (PM) returned 42% and 45%, respectively, over the past year; again, in the middle of a major pandemic.

Sex Stocks

The sex industry is so enormous, though much of it underground, which makes it hard to find precise industry figures. But in recent years, a number of companies in the p*rnography industry, condom manufacturing, and even makers of drugs designed to enhance a sexual experience have gone public.

Just like gambling, the Internet brings a whole new dimension to this business. It may be a taboo subject, but there are companies doing very well selling p*rnography on the Internet (though most of these firms are not publicly traded).

Even if you ignore the more brazen and visible operators, like Playboy and Hustler, there are a great many more innocuous industries that benefit from the sale of sex, such as hotel and cable operators that make handsome sums from their pay-per-view movies.

Today, the best publically traded example of a sex stock is RCI Hospitality Holdings (RICK). The company owns and operators upscale adult nightclubs such as Rick's Cabaret, Jaguars Club, Tootsie's Cabaret, and XTC Cabaret.

Defense Stocks

Although the defense industry represents one of those gray areas that we alluded to earlier, in most circles these stocks are considered sinful.

The production of missiles, guns, tanks, and fighter jets can be interpreted in different ways. Either you view it as destructive and harmful to the entire human race, to those in the country where the arms are destined, or you may feel that it is simply a proactive measure for protecting one's nation.

Regardless of your ethical or moral stance on the issue, there is no debate on the profitability of the manufacture, sale,and distribution of military equipment. One example of a defense stock includes Lockheed Martin (LMT).

Irresistible Returns

Industries that lure us with "naughty" temptations can offer a good place to park a portion of your portfolio. First of all, these companies provide relatively stable returns to investors, both in good times and bad.

As the old saying goes, "What do you do to celebrate good times? Drink, smoke, gamble, and have sex." And what do many do during stressful and recessionary times? "Drink, smoke, gamble, and have sex."

The returns provided by the companies related to these activities are often less prone to the cyclical downturns of the economy. They provide respectable returns in times of prosperity as well as welcome returns during the market and economic slumps.

In addition to being somewhat insulated from the cyclical nature of the economy, many sin stocks are renowned for providing consistent dividend payments.

Why Do It?

The simple answer isinvestment returns. A great number of companies in these industries have time and again turned a healthy profit and will continue to do so. By neglecting all of the companies within these industries you may restrict your portfolio's ability to make some solid gains. It's easy to understand why; many of these businesses revolve around addiction.

Gambling, tobacco, and alcohol are all habit-forming products or activities. Here is where the morality argument comes in. Few would debate that cigarette smokers or frequent gamblers are very loyal customers. But is it ethical to keep on taking a gambler's money even though they have a serious problem? What about selling beer to an alcoholic? Clearly, there are no easy answers here and it's a decision each investor has to make personally.

While we wouldn't suggest a portfolio toconsistof only sinful stocks, holding a portion of it in a balanced portfolio is worth considering. Just as in all industries, there will be firms that outperform others and by no means will all stocks involved in these types of businesses be prosperous. You will still have to do your homework to select the best ones.

How to Invest?

ETF companies have even made it easier for you to invest in sinful companies and get instant diversification in the industry. Issuers like Invesco, VanEck, ETFMG, and AdvisorShares all offer ETFs that invest along these lines; a socially responsible investor's nightmare.

Take, for instance, the AdvisorShares Vice ETF (VICE). This ETF seeks long-term growth by investing in "vice" companies such as those involved with alcohol, tobacco, gaming, and other vice-related activities. Some of the fund's biggest holdings include The Boston Beer Company, Turtle Beach (HEAR), and Jack in the Box (JACK).

If marijuana is your sinful stock of choice, take a look at the ETMFMG Alternative Harvest ETF (MJ). MJ tracks the Prime Alternative Harvest Index, which is designed to measure the performance of companies in both the global medicinal and recreational cannabis sectors. Its top holdings include Tilray (TLRY), Canopy Growth (CGC), and Cronos Group (CRON).

The VanEck Vectors Gaming ETF (BJK) is another easy way to jump into sin stocks. The goal of this ETF is to mimic the MVIS Global Gaming Index, which is an index designed to track the overall performance of companies involved in casinos, sports betting, lottery services, gaming services, and gaming technology. A few of the ETF's top holdings include Las Vegas Sands, Caesars Entertainment, MGM Resorts, and DraftKings.

Finally, if you'd like a little bit more diversification, you can try the Invesco Dynamic Leisure and Entertainment ETF (PEJ). PEJ is based on the Dynamic Leisure and Entertainment Index, which is comprised of 30 U.S. companies based in the leisure and entertainment industries. Some of the ETF's holdings include gambling stocks like Churchill Downs (CHDN), Penn National Gaming (PENN), and Boyd Gaming Corp (BYD). So while PEJ isn't exactly a "pure" play on sinful investing, it still allows you to gain a bit of exposure to vice-based businesses while staying diversified.

Just as ETF families may offer a technology fund or an energy fund, investors now have access to diversification and professional management within the tobacco, gambling, alcohol, defense,and sex industries.

You can be sure that a socially conscious investor wouldn't even think of participating in these types of investments. But for some, investing means nothing more than finding companies that stand the test of time and make a lot of money.

On the other hand, if you feel a company does not meet your social standards, speak up with your dollars, and refrain from investing.

Advantages and Disadvantages of Sin Stocks

There are several advantages to investing in sin stocks. As we've discussed, the biggest benefit is the upside potential they're able to provide, whether the overall market is climbing or declining. Sin stocks are far more immune to economic shocks than more cyclical businesses.

Let's face it: people drink, smoke, gamble, and have sex in both good times and in bad.

Sin stocks also benefit from monopolistic returns. Industries like tobacco, alcohol, and gambling are highly regulated, so the big companies already entrenched in the space often have very little competition.

Sin stocks can provide market-beating returns which are nicely complemented by historical stability. That's the best of both worlds.

Another advantage of sin stocks is that they tend to be systematically underpriced. In other words, you can usually pick them up at "bargain" prices. Since sin stocks carry such a negative stigma, many investors continue to avoid them. However, this gives other investors the opportunity to scoop them up at cheap risk-adjusted prices.

Of course, there are disadvantages to investing in sin stocks. While demand for things like tobacco and alcohol is certainly stable, sin stocks face higher regulatory and taxation risks than the average company. Since there are so many ethical questions tied to these industries, they're always vulnerable to shifts of national and political opinion.

The Bottom Line

Whether or not you agree with sinful investing is a personal choice; however, human weaknesses and the lure of sinful pleasures are unlikely to disappear soon. If you have a long-term outlook and seek a little excitement, try adding a bit of peccadillo to your portfolio. For more insight, you might even look into theevolution of sinful investing.