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As controversial as the name implies, sin stocks represent companies from so-called vice industries such as alcohol, tobacco and gambling.

Think Sin City, but in stock form.

The term was initially adopted by faith-based groups who wanted to invest in securities that excluded businesses they considered morally questionable, according to an article by the Columbia Business School.

But as the popularity of socially responsible investing has grown over the last decade, the term sin stocks has evolved, and may now include fossil fuel companies, military defense contractors and other businesses some investors consider harmful to society.

What are sin stocks?

Sin stocks, also known as vice stocks, are shares of companies that operate in industries often considered unethical or immoral. Alcohol, tobacco, gambling, cannabis, adult entertainment and weapons are the most common industries associated with the term. The word “sin” suggests that the products or services these companies provide can damage or exploit consumers.

But what makes a stock sinful is subjective. Some lists of top sin stocks include shares of oil and gas companies — as well as military contract giants — alongside casinos and breweries.

Despite their shady name, sin stocks have been popular among some investors due to their potential for strong financial returns during economic downturns.

Relationship between sin stocks and ethical investing

Sin stocks and ethical investing — also known as environmental, social, and governance-focused (ESG) — sit at opposite ends of the investing spectrum. Ethical investors aim to align their portfolios with their values and often avoid companies they believe prioritize profits over people and the environment.

However, some investors argue that these companies meet existing consumer demand and operate legally, noting that these stocks shouldn’t be excluded based solely on moral grounds.

Interestingly, being labeled as a sin stock might actually spur positive ESG initiatives at the corporate level. Researchers from Columbia Business School found that the number of ESG proposals in annual meetings was higher for companies of sin stocks than non-sin stocks. This might suggest that shareholders put more pressure on the company’s leadership to enhance their ESG performance, in part, because sin stock carries a big stigma.

Examples of sin stocks

Classifying sin stocks isn’t an exact science since the definition of sin can vary widely depending on personal beliefs and social norms.

That being said, here are five stocks that traditionally fit the category.

  • Constellation Brands, Inc. (STZ): Constellation Brands is a major player in the alcohol beverage industry, producing and distributing a portfolio of popular beers, including the exclusive rights to import, market and distribute Corona in the U.S. The company’s stock has netted investors strong and steady returns over the last three years, proving particularly resilient during the bear market of 2022.
  • Anheuser-Busch InBev (BUD): Anheuser-Busch InBev, often referred to as AB InBev, is the world’s largest brewer with a massive global distribution network. They own a portfolio of iconic beer brands including Budweiser, Michelob and Stella Artois. While the stock enjoyed a rally (like most of the market) in mid-2020, BUD is down about 40 percent in March 2024 from its pre-pandemic high in July 2019. The stock offers a roughly 1.37 percent dividend.
  • MGM Resorts International (MGM): This hospitality giant owns and operates a portfolio of luxury hotels and casinos, including the Bellagio and MGM Grand in Las Vegas. The company’s stock price took the obligatory Covid-19 nosedive as travel and entertainment ground to a halt but MGM has since made a strong recovery.
  • DraftKings Inc. (DKNG): DraftKings is a pioneer in the online fantasy sports and mobile sports betting market. It’s a major competitor to FanDuel, and both companies are rapidly growing as more U.S. states legalize sports betting and online gambling. DraftKings went public in April 2020 and its skyrocketing stock price reflects the flood of users who flocked to the platform to gamble during lockdown. The company’s financials indicate a steady increase in profits, but the stock has been volatile over the last two years as DraftKings faces ongoing legal struggles and potential regulatory challenges.
  • Philip Morris International Inc. (PM): Philip Morris International is one of the world’s leading tobacco companies, best known for its Marlboro cigarette brand. It faces significant challenges due to declining smoking rates. However, Phillip Morris has invested heavily in smoke-free alternatives to reduce their dependence on traditional cigarettes. Despite challenges, Phillip Morris remains a behemoth company, with a market cap of over $145.2 billion in March 2024. It offers a dividend yield of nearly 5.5 percent, making it one of the highest-yielding dividend stocks and an attractive option for income investors. Its stock has performed well over the last three years, outpacing its pre-pandemic share price.

Since sin is in the eye of the beholder, companies in other industries can also be considered sin stocks. Weapons manufacturers like Smith & Wesson (SWBI) often make the list, and depending on your moral perspective, companies in the defense sector like Lockheed Martin Corporation (LMT) or fossil fuel companies like Exxon Mobil (EOM) could also make the cut.

Benefits of sin stocks

While sin stocks are associated with controversial industries, they also offer potential benefits for investors. Here are a few reasons why some investors are drawn to these stocks:

  • Steady demand: Sin stocks often come from industries with a steady consumer base and a demand that remains resilient, even during economic downturns. This stability may make these stocks more recession-proof than other types of stocks.
  • High profitability: Given that these industries often face fewer competitors due to regulations, sin stocks can offer high profit margins. They also have more power to raise prices on consumers.
  • Undervaluation: Some sin stocks may be undervalued due to their negative public image, making them attractive to investors willing to overlook the associated ethical concerns.

Downsides of sin stocks

Sin stocks might sound alluring but there are potential drawbacks to investing in them.

Here are a few risks associated with sin stocks:

  • Ethical concerns: Sin stocks pose a clear ethical dilemma for investors. These industries often profit from products or activities that can lead to negative health and social consequences.
  • Regulatory and taxation risks: Sin stocks often face higher regulatory scrutiny and taxation, known as “sin taxes,” which can impact their profitability.
  • Market limitations: The stigma associated with these industries might discourage competition, which could affect market dynamics and long-term sustainability.
  • Market volatility: Sin stocks can be more volatile than other stocks due to shifts in societal attitudes and laws. Also, underlying fundamentals and profitability can vary widely from company to company.

Performance of sin stocks

Because sin stocks cover a variety of industries and products, it’s impossible to generalize their performance as good or bad. Some of these companies have performed well, while others have suffered tremendous losses.

Cannabis stocks, despite the initial hype, have been a dumpster fire for shareholders the last three to four years. Federal legalization hasn’t materialized, competition has intensified, many companies struggle with profitability and an oversupply of product has driven down prices.

Shares of Aurora Cannabis (ACB), a Canadian marijuana producer, traded at more than $1,000 in April 2019. As of March 2024, the stock had tanked to less than $4. Shares of another pot stock darling, Canopy Growth Corporation (CGC), were down an unbelievable 99.8 percent from its January 2021 highs.

While major names like Phillip Morris and Anheuser-Busch have generally performed well, both companies have faced headwinds in recent years as more people turn away from cigarette and alcohol consumption. Both are making investments in alternative products, such as e-cigarettes and alcohol-free beer, in an effort to improve their long-term financial outlook but risk remains.

Sin stocks might carry a stigma, but that doesn’t necessarily stop investors from piling in if the company is growing revenue and the stock price is right. As researchers from Columbia Business School noted in a 2022 paper: “When the demand for sin stocks is large enough, their stock prices and stock returns…are not different from that of non-sin stocks.”

How to invest in sin stocks

Investing in sin stocks follows the same process as investing in any other stock.

  1. First, identify companies and research their financial performance, dividend yields and market shares. Make sure to have a solid understanding of the industry, including potential political and regulatory risks, before buying any stock.
  2. Next, you’ll want to find an online broker that allows you to buy stock and other kinds of investments. Bankrate’s detailed reviews of the best online brokers can help you find a company that meets your needs.
  3. Finally, you’ll want to pick your investments. You can invest in individual stocks or stock funds, which typically own dozens or hundreds of stocks.

There are a couple themed exchange-traded funds (ETFs) that cater to the novelty of sin stocks, including AdvisorShares Vice ETF (VICE) and USA Mutuals Vice Investor (VICEX). But unlike the best index funds, these themed ETFs come with high expense ratios and lackluster performance. VICE has netted a 5-year return of about 4 percent, well below the overall market average, and with an expense ratio of 0.99 percent, you’re paying a premium for it, too.

Alternatively, you can get exposure to some sin stocks through a regular low-cost S&P 500 index fund. For example, tobacco giants Philip Morris and Altria (MO) are both members of the index as well as four major casino companies: MGM Resorts, Las Vegas Sands (LVS), Caesars Entertainment (CZR) and Wynn Resorts (WYNN). An S&P 500 fund is a great option because it offers diversification and reduces your risk (and sin stocks come with plenty of risk) from owning shares of individual companies.

Bottom line

Despite their controversial nature, sin stocks — like any company — have the potential to deliver profits and solid financial returns. Just keep in mind that evaluating each individual business is key since sin stocks may face greater regulatory risks and overall volatility than companies in the broader market.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.