Capitalism is not moral, nor is it immoral. Capitalism is amoral. In fact, one might argue it actually is moral because it creates wealth and generally uplifts a populace. Regardless, some people shiver at the very notion of “vice stocks” because they don’t want to invest in something that’s “bad” for people.
I have news: Everything is bad for you. So eschewing so-called “vice stocks” is a terrible idea, because many of them have established decades of stability and dividend payments. That’s because people will always use things that are “bad,” get it?
So start thinking about vice stocks — drugs, booze, rock n’ roll, junk food and strip clubs — for your retirement portfolio. Well, maybe not strip clubs, although you can actually invest in a couple of stocks that own them.
Certainly, though, the other vice stocks categories can make you rich if you don’t mind being “sinful.”
Vice Stocks to Buy: Philip Morris (PM)
Why It’s ‘Bad’: Cigarettes
Why It’s ‘Good’: 4% yield
Philip Morris International Inc. (NYSE:PM) finally broke out of a four-year trading range, where it hovered between $80 and $96 per share. It is presently at its all-time high around $103.
Tobacco usage has been declining as far as growth over the past decade, however the rise in e-cigarettes is an area where PM has moved with success.
The international play on tobacco is, some feel, more uncertain than domestic companies. That’s partly true because so many countries have so many regulatory compliance issues for PM. However, I feel that is offset by the fact that smoking is a big thing in virtually every country.
PM’s results will vary from quarter to quarter and even year to year. However, as a retirement stock, I like it because the long-term trend is up and because it generates just shy of $8 billion in free cash flow and pays most of it out as a 4% dividend.
Vice Stocks to Buy: Anheuser-Busch (BUD)
Why It’s ‘Bad’: Booze
Why It’s ‘Good’: 3.2% yield
You can choose from many alcohol companies if you want to talk about vice stocks, but at the end of the day I have to go with Anheuser Busch InBev SA (ADR) (NYSE:BUD).
Ironically, the legendary name is trying to increase sales in its low-alcohol and alcohol-free beers going forward, to the point where they make up 20% of sales. As it is, BUD makes 30% of the world’s beer and it is about to buy up the largest rival out there: SABMiller plc (ADR) (OTCMKTS:SBMRY).
This push for lower-alcohol beer is partly in response to the grassroots movement of craft beers. Clearly, BUD knows beer, so making a drink that alcoholics can enjoy opens up a whole new market and earns BUD great PR as well.
BUD is also a cash flow powerhouse, generating almost $10 billion of FCF annually, and paying out about 80% of it as its 3.2% yield.
Vice Stocks to Buy: Yum! (YUM)
Why It’s ‘Bad’: Junk food
Why It’s ‘Good’: 2.1% yield
How about some junk food for your vice stocks? I think you have to consider Yum! Brands, Inc. (NYSE:YUM), partly for its 2.1% yield, but more for its longer-term capital gain potential.
Yum! came in with some solid earnings this week, with core operating growth now expected to be 14% as opposed to 12%. China continues to be big for YUM, and the company plans to spin off those operations.
Some may argue instead for McDonald’s Corporation (NYSE:MCD) and I don’t necessarily disagree. I just like the diversification of product more in YUM. McDonald’s is a great choice with great cash flow and a global brand, but it is still in the midst of a turnaround.
I also see YUM as a possible acquisition target down the line. Warren Buffett loves that kind of play. I think when you factor that in, along with the diversification, it’s probably a slightly better move.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.
