"Sin" stocks, businesses involved in alcohol, tobacco, weapons, gambling, and other morally ambiguous and permanently controversial areas, are not the types of investments you're likely to go telling your neighbors about. That said, a few "sin" companies are worth more than a mere furtive glance. I've found three businesses in alcohol and tobacco with the potential to be great investments.
Tobacco is wacko -- if you hate money
Warren Buffett, arguably the greatest investor of all time, has said this about the tobacco industry:
I'll tell you why I like the cigarette business. It costs a penny to make. Sell it for a dollar. It's addictive. And there's fantastic brand loyalty.
It's hard to get the brand loyalty that tobacco behemoth Reynolds American
However, Reynolds' main strength as an investment stems from its dividend, which stands at a smokin' 5.2%. Now if that's not healthy, I don't know what is! While Reynolds' products don't necessarily epitomize safety for the consumer, the wise investor can count on Reynolds for a hefty dividend.
But beware, income investors, of something called the payout ratio. This metric represents the fraction of net income distributed to stockholders in the form of dividends, and Reynolds' payout ratio is currently 96%. In the tobacco industry, this number tends to be pretty high, since the businesses are already well-established, mature companies that can afford to reward their shareholders through dividends. But 96% is still a little steep -- the industry average is 71% -- so if you're an investor, keep an eye on that number and make sure it doesn't trend upward too dramatically. This is doubly true for investors in fellow tobacco giant Altria Group
If you booze, you can't lose
Brazilian company AmBev
Did I mention that AmBev pays around a 3.7% dividend and trades at a P/E almost negligibly higher than its peers? No, I didn't. But now you know.
Anheuser-Busch is another prominent brewer that will shell out some cash while you watch your investments play out. Its current yield is nearly 2% per year (with a payout ratio of only 27%), it's the largest brewer in the world, and its trailing year earnings are up more than 90% from the year prior. Add to that a portfolio of some of the world's leading brands (Budweiser, Beck's, and Hoegaarden, to name a few), and you have the makings of a tasty investment.
A handful of "sin" equities are well positioned for market outperformance. Sturdy dividends, powerful brands, and customer loyalty are a few reasons these stocks are so attractive. In particular, I strongly believe in Reynolds American's ability to beat the market, which is why I made a thumbs-up CAPScall on the stock back in November.
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Fool contributor John Divine owns none of the stocks mentioned in the story above, but he has done some rather hands-on research on Anheuser-Busch InBev, in the spirit of good journalism. You can follow him on Twitter, @divinebizkid, and on Motley Fool CAPS, @TMFDivine. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.