Impact investing is a big trend right now. Investors want to both make money and make a difference in the world. That’s a noble attitude. However, the ethical lines can be complicated, and there are many disagreements over which businesses actually increase social good or not. Regardless, as investors flock to “good” companies, it creates opportunity at the other end of the spectrum: the sin stocks.
As Economics 101 dictates, when demand for something drops, you have to lower the price to find equilibrium. With investors wanting to do good, the stock prices of more sinful stocks have declined. Be it tobacco, alcohol or defense industries, for example, there are bargains throughout the vice stocks.
Not all sin stocks are inherently good investments. Sometimes a company can be both morally questionable and financially irresponsible as well. However, in general, a lot of vice industries have generated stock market-crushing returns. Tobacco companies, for example, were the single best performing U.S. stock sector between the 1930s and 2015. Coming in second were the beer, wine and liquor stocks.
With all that in mind, here are seven sin stocks paying generous dividends to put on your watchlist today:
- Altria (NYSE:MO)
- British American Tobacco (NYSE:BTI)
- Innovative Industrial Properties (NYSE:IIPR)
- Diageo (NYSE:DEO)
- Corby Spirit and Wine (OTCMKTS:CBYDF)
- Lockheed Martin (NYSE:LMT)
- General Dynamics (NYSE:GD)
Sin Stocks: Altria (MO)
Dividend Yield: 6.58%
Altria has enjoyed a stealth comeback over the past year. This time last year, MO stock was on the ropes. The company had infamously overpaid for its investment stake in vaping leader Juul. Vaping has run into regulatory problems, and Altria suffered a huge write-down on that investment. On top of that, investors worried that the novel coronavirus might cause a decline in smoking, particularly among vulnerable populations.
Fast forward, however, and the tide is turning. MO stock has jumped 27% in recent weeks and hit new 52-week highs. The old problems are still there, to an extent. It’s unclear what the future looks like for Juul, or how Altria will evolve as traditional cigarette sales continue to decline. Altria has made investments in other fields, such as cannabis, but none of those are looking like home runs just yet.
However, last year, MO stock was trading at 8x earnings and paying a 9% dividend yield. Pretty incredible for a blue-chip stock like this one with such consistent cash flows. Even after the recent rally, Altria is still going for just an 11x price-to-earnings (P/E) ratio (and earnings are growing) while paying a 6.58% dividend yield.
While Altria isn’t quite as cheap as it was, the stock still represents a fine income investment at this price.
British American Tobacco (BTI)
Dividend Yield: 7.54%
Altria is hardly the only cheap tobacco stock out there. British American Tobacco is another fine choice at today’s prices.
Due to a combination of mergers and smart management choices, British American Tobacco has actually grown its business strongly in recent years, despite the drop in overall smoking rates worldwide. Yet, BTI stock is trading as if it’s potentially going out of business soon.
The company is expected to earn $4.50 per share in earnings this year, which would put the stock at less than 9x earnings. And then, in 2022, analysts see earnings jumping another 5%, putting the P/E closer to 8x. This is crazy pricing for a business that is flat, let alone growing slightly.
Yes, there are clear risks here. Overall, cigarette usage continues to decline internationally. And politicians can always hit the industry with more regulations and taxes. That said, the tobacco industry has endured a whirlwind of lawsuits, taxes and negative public relations campaigns over the past 25 years, and yet it still lives on.
BTI stock has less growth prospects than most of the stocks on this list. However, with a 7.54% dividend yield and a 9x P/E ratio, the stock is priced for success regardless.
Innovative Industrial Properties (IIPR)
Dividend Yield: 3.03%
I recently gave a full-length review of leading cannabis real estate investment trust (REIT) Innovative Industrial Properties. The quick summary is that the company is taking advantage of a clever gap in the cannabis market.
Because marijuana remains illegal federally, banks don’t want to risk lending to cannabis growers. So Innovative has stepped in. It buys land and greenhouses and then rents them out to marijuana companies at high prices. This effectively provides funding to marijuana growers (since the cultivators don’t have to put up the capital for greenhouses themselves) while avoiding any direct legal concerns.
IIPR stock has grown like a weed since its initial public offering (IPO). Shares are up more than 820%. And Innovative has offered a quickly increasing dividend as well. IIPR stock’s 3.03% dividend yield is solid on its own. It gets much better once you realize how fast it’s growing. The firm has raised its dividend more than once a year, as its cash flows have grown quickly. Over the past year, the dividend payout is up more than 30%.
The one main risk here is marijuana legalization on a federal level. If and when that happens, IIPR’s profit margins would likely slump. That’s because cannabis growers could get loans from banks directly instead of needing third-party financing arrangements. However, it appears that legalization isn’t in the cards just yet, and so IIPR stock could have many more good days ahead of it.
Dividend Yield: 2.25%
Diageo is the worldwide leader in the production and sale of alcoholic spirits and liquors. It is most known for Scottish whiskey, though it also has big brands in vodka, tequila and other spirits. Outside of hard liquor, Diageo is also the owner of Guinness beer.
DEO stock initially slumped during the pandemic. Investors feared that the closure of restaurants and bars would hurt the company’s bottom line. And that affected results to an extent to be sure. However, it was more than compensated for by increased beverage sales at liquor stores and other such outlets. In the U.S., for example, liquor sales surged 8% in 2020 — that was the biggest jump in decades.
Going forward, earnings results may be mixed. Bar and restaurant sales will come back online, however consumption at home is likely to decline. Regardless, alcohol stocks have once again proven themselves to be resilient in the face of economic uncertainty.
Diageo, in particular, is compelling for dividend investors. While the starting yield admittedly isn’t the highest, Diageo has increased its dividend every year since the company’s official formation in 1997.
Corby Spirit & Wine (CBYDF)
Dividend Yield: 4.76%
If you want a lot more yield out of the alcoholic beverages sector, look to the north. In Canada, you’ll find Corby Spirit & Wine. It produces and distributes hard liquors such as Wiser’s Whiskey and Lamb’s Rum. These may not be big names in most countries, but they have a stable, strong position in the Canadian market.
Corby has shown little growth in recent years, making it less attractive on that front than, say, Diageo. However, Corby trades at a compelling 16x earnings and pays out a large chunk of that with its dividend. You get the regular dividend yield, which is already compelling. On top of that, the company pays occasional special dividends as well. As Corby is focused on lower-cost spirits, it’s also quite immune to changes in economic conditions.
This isn’t one of the more exciting sin stocks out there, but with a nearly 5% dividend yield, it doesn’t need to be. Finally, it should be noted that while the American CBYDF stock listing is somewhat illiquid, shares are easy to trade on the Toronto stock exchange under the company’s “CSW-A” ticker.
Lockheed Martin (LMT)
Dividend Yield: 2.79%
To round out the list, we have two defense stocks. You can quibble over whether these are sin stocks in particular or not. Defense companies don’t harm an individual in the same way that excessive alcohol or drug use might. However, defense companies are certainly shunned by many on a societal level. Numerous environmental, social and governance (ESG) funds exclude defense firms from their portfolios because of this angle. As such, I’d argue they count as sin stocks.
Leading the pack, we have Lockheed Martin. The firm is known for its combat planes, such as the F-35. The company has multi-decade contracts for these aircraft, offering consistent long-term revenue as far as the eye can see.
On top of that, there’s an increasingly interesting space element to the story. Lockheed Martin is a leader in building satellites, and it’s now branching into more technologies that should help power humanity’s effort to explore the solar system and potentially colonize other planets in the future. Cathie Wood of Ark Investments has bought into LMT stock for the Ark Autonomous Technology and Robots ETF (BATS:ARKQ). Additionally, Ark’s new Ark Space Exploration ETF (NYSE:ARKX) includes LMT stock as well.
In any case, Lockheed Martin sits in a nice position. It’s cheap — selling for around 15x earnings — and pays a strong dividend. And at the same time, it offers exciting growth prospects that you don’t often see in this sort of blue-chip name. If you want income with an exciting technology angle as well, LMT stock fits the bill.
General Dynamics (GD)
Dividend Yield: 2.4%
General Dynamics is another blue-chip aerospace and defense company. Unlike Lockheed, it takes more to the seas than the skies; General Dynamics is most known for its submarines and other naval vessels. It also has a wide variety of other defense businesses, such as in munitions and tanks.
Like other defense companies, GD stock sold off hard over the past year. This was due to worries about the incoming administration under President Joe Biden, along with some pandemic issues. Social distancing requirements in particular complicated manufacturing efforts for the company.
However, the company is back on the upswing. It has near-record backlog, indicating that it has plenty of contractual work ahead of it. GD stock is going for just 16x earnings now. And analysts see it growing earnings per share (EPS) at 10% per year over the next two years, moving the P/E ratio to an even more favorable level.
Finally, the company is a Dividend Aristocrat, as it has hiked its dividend for 26 consecutive years. With that sort of history, a solid 2.4% starting yield and rapidly increasing earnings, there’s a lot to like about General Dynamics going forward.
On the date of publication, Ian Bezek held a long position in MO, DEO, LMT and GD stock.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.