What are Sin Stocks?

Sin stocks are shares in companies who may be considered unethical or immoral. A sin stock portfolio, for example, will mainly include shares in alcohol, tobacco, gaming, or defence companies, whereas, what is known as ethical or socially responsible portfolios will include stocks in companies related to financial, technology, medical, or alternative energy sectors.

Many have argued about whether sin stocks can provide higher returns than ethical stocks, but this has been questioned by a European study which has found that there is no significant difference in returns between ethical and so-called unethical portfolios.

In this article, we look at sin stocks and why investors find them interesting.

Why investors prefer sin stocks

Sin stocks are not everyone’s cup of tea. They are considered defensive stocks, as they appear to perform well even during an economic recession, but they involve risks relating to regulations and taxes.

Supporters of sin stocks often lay emphasis on how many ethical stocks have high management fees which limits returns. They also stress that fund managers avoid sin industries which makes sin stocks comparatively cheap, while the consistent cash flows mean that sin stocks can make large dividend payouts. This, combined with low stock prices, means that investors can get remarkably good dividend yields.

Why investors avoid sin stocks

However, high dividend yields of sin stocks are very often avoided by investors as many of them highlight the dubious character and effect of the sin industries on society.

Another reason that sin stocks might not appear as appealing to investors is the prospect of taxation on such goods as alcohol and tobacco. In such countries as the US, UK and Japan, there is increasing pressure for those countries to increase taxation on tobacco and alcohol. Furthermore, it is expected that government defence expenditures will be reduced too. The gaming industries could also face increased taxation, which would eventually limit sin industry profits. For current investors in sin industries this could potentially affect their returns.

There’s high regulatory risk with sin stocks, as rules can change depending on political parties and international activity, making certain industries illegal or legal.

Additionally, consumers change their attitudes towards certain products which can also lead to limited or increased interest in certain products such as tobacco.

With, 2008 and the financial crisis, a lot of investors have turned away from excesses and towards ethical concerns and businesses, which also means that the future will continue to be dominated by more ethically oriented businesses and investing.

What to consider when investing in any stock

For example, Islamic investors, following Shariah law, will avoid investments in alcohol, tobacco, pork, gambling, pornography as well as short selling, speculation, and derivatives. Others might avoid shares in companies that their products go against their personal beliefs, whether that is animal rights or addictive substances.

Whether a company produces ethically grown vegetables or weapons of mass destruction, an investor should be able to make their own choices based on their personal beliefs while ensuring that any shares they invest in are part of a healthy and well-balanced portfolio that includes other assets such as forex or spot metals. In general investing is always about the choices we make and whether we want to be socially responsible or we feel strongly about certain matters. In the end of the day, it is up to the individual investor to decide and whether any ethical concerns should affect their investment choices.

Disclaimer:

This information is not considered as investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.

Share: