Published November 1st, 2022, by Josh Arnold
In the world of investing, there are certain sectors that tend to lend themselves more to growth, value, or great dividend characteristics. Depending upon one’s goals, allocating most appropriately to these characteristics can make a big difference to total returns over the investor’s lifetime.
One type of stock that tends to see a high rate of dividend payers is so-called “sin stocks.” These are stocks that are generally defined as those selling tobacco or alcohol, but recently expanded to those selling cannabis or other related products that have age restrictions.
You can see the full downloadable spreadsheet of all 47 Dividend Kings (along with important financial metrics such as dividend yields, payout ratios, and price-to-earnings ratios) by clicking on the link below:
Click here to download my Dividend Kings Excel Spreadsheet now. Keep reading this article to learn more.
Sin stocks tend to see fairly stable earnings during all kinds of economic conditions, which is why the group lends itself to dividend investors as a good choice for income. In this article, we’ll take a look at 10 sin stocks we like today for total returns and income prospects.
Universal Corp. (UVV)
Our first sin stock is Universal Corporation, which is a supplier of tobacco leaf and plant-based food ingredients worldwide. The company has a spotty history of growth given it is beholden to global demand for cigarettes and cigars, which has been waning for many years. The rate of decline is slow, however, so we believe Universal has the ability to pay its ample dividend for many years to come.
We see 1.5% growth moving forward, as pricing increases should help offset declines in overall demand. The stock is trading for slightly more than our estimate of fair value, so shareholder returns could be partially offset by a reversion to fair value at 13 times earnings.
Universal, however, has an outstanding dividend increase streak of 51 years, making it a Dividend King. This longevity, as well as the 6.5% dividend yield, make Universal a great dividend stock buy.
We see total returns at ~6% annually in the years to come, so it isn’t quite at the point where we’d rate it a buy for total returns. However, the fact that it is a 6.5%-yielding Dividend King lands it on this list.
Imperial Brands PLC (IMBBY)
Our next sin stock is Imperial Brands, which is a maker of various tobacco products, including cigars and cigarettes, as well as vaping, oral nicotine, and heated tobacco products that operates globally. Imperial was founded in 1901 and is based in the United Kingdom.
Imperial grew quite rapidly out of the Great Recession, with earnings roughly tripling between 2012 and 2018. Growth has stagnated since then, however, and we forecast 3% earnings growth going forward from 2022 levels.
Imperial is a bit different than most dividend stocks in that the dividends it declares are variable. That means that dividend cuts are quite frequent, but it also means that if one can live with the variability of the payments, dividends during good years can be very high.
This year, we expect about $1.80 per share in dividend payments, which is good for a current yield of 7.3%. Like Universal, Imperial is an extremely high-yielding stock, and therefore is worth a look for income-focused investors.
The stock is about 10% overvalued today, in our view, which reduces the total return outlook. Still, we expect solid ~7% total returns in the years to come, driven mostly by the ample dividend yield.
Philip Morris International Inc. (PM)
Next up is Philip Morris, one of the largest tobacco companies in the world by market cap. Philip Morris makes and distributes a variety of cigarettes and related products outside the U.S. However, it is on a long-term journey to eventually move smokers off of its tobacco products and into smoke-free products. Over time, Philip Morris plans to cease being a tobacco company, but that is still many years away. For now, it is firmly in the category of sin stocks, and a rather good one.
Growth in earnings has been challenging in recent years as the company is subject to foreign exchange fluctuations, as well as waning demand for cigarettes in particular. We think Philip Morris can add 3% annually to earnings, on average, driven by pricing increases and share repurchases.
The company has a 15-year streak of dividend increases, which began when it was spun from former parent Altria, which we’ll look at below. We think Philip Morris has a robust dividend story behind it, but also looking forward.
The stock is yielding 5.7% today, making it another high-yield sin stock at almost four times that of the S&P 500. Philip Morris trades right at fair value, so we don’t see any impact going forward on returns from the valuation.
In total, we think the stock can see average annual returns of better than 8% in the years ahead, making it a solid pick when considering its yield and dividend history.
Molson Coors Beverage Company (TAP)
Molson Coors is a manufacturer and distributor of beer and malt beverages that operates globally. The company owns ubiquitous brands such as Coors, Molson, and Blue Moon, and has an enviable global distribution network.
Growth has been hard to come by in recent years after a rapid ascension out of the Great Recession. Since peak earnings were hit in 2018, Molson Coors has struggled somewhat to produce earnings growth. We see 4% growth going forward as the company has recognizable brands with pricing power, and as the company is aggressively cutting costs.
Molson Coors cut its dividend during the COVID recession, so its increase streak stands at just two years. The dividend is nearly back to pre-COVID levels, however, and the yield is quite strong at 3% today, which is nearly double that of the S&P 500.
Shares also trade about 10% below fair value, so we see a nice tailwind to returns from the valuation in the years to come. Combined with the yield and projected growth, we think Molson Coors can produce ~9% total returns in the coming years.
Anheuser-Busch InBev SA/NV (BUD)
Our next stock is Anheuser-Busch InBev, which is the combination of the formerly separate Anheuser-Busch and InBev businesses that merged in 2008. That merger created the largest alcoholic beverage company in the world, and one that owns 500 different beer brands. These include Budweiser, Corona, Stella Artois, Michelob Ultra, Modelo, and more of some of the world’s most popular beers.
AB InBev has a spotty history with earnings growth, as it sees peaks and troughs over time. This history of uneven growth meant that the dividend was unsustainable in 2016 and 2017, and was cut sharply. The company now pays a much lower, variable dividend each year.
That dividend is good for a current yield of just over 1% today, meaning the stock is one of the lowest-yielding sin stocks in the market today.
However, shares trade at a discount to fair value of about 25%, so we see a strong tailwind to total returns from the valuation in the years to come. In concert with projected 3% growth, we think AB InBev can provide ~10% total returns to shareholders in the years to come.
British American Tobacco PLC (BTI)
Our next stock is British American Tobacco, a company that makes and distributes a wide variety of cigarettes, snuff, heated tobacco, and oral nicotine products globally. The company owns some highly lucrative brands, including Camel, Lucky Strike, and Newport, among others.
British American Tobacco managed to boost earnings in the past decade, although progress has seen some starts and stops. Still, we think 3% growth looking forward is reasonable given the company’s focus on share repurchases, as well as its pricing power with its strong suite of brands.
The company pays a variable dividend each year, so its streak of dividend increases stops rather frequently. In addition, dividends are declared in British pounds, so there is a measure of currency translation risk for U.S. investors. Even so, the stock yields more than 7% today, making it a very strong income stock on that measure.
Shares trade slightly below fair value, so we see a modest tailwind to total returns from the valuation in the coming years. Combined with the huge yield and 3% growth, that should be good enough for the stock to produce ~10% total annual returns over the next five years.
Diageo PLC (DEO)
Our next stock is an alcoholic beverage maker, Diageo, that makes and distributes high-end liquors, including scotch, gin, whiskey, rum, wine, tequila, and more. The company’s portfolio includes perennial winners such as Johnnie Walker, Crown Royal, Smirnoff, and Guinness, among others.
Diageo’s earnings tend to ebb and flow, like many others on this list, but it has managed strong growth in the past three years. We see robust 8% growth looking forward, as the company’s revenue continues to move much higher, and margins are improving.
Diageo raised its dividend for nine consecutive years, and we expect that streak to get much longer over time. Diageo’s payout ratio is under half of earnings, and its rapid earnings growth rate should afford it the ability to continue to increase the dividend indefinitely. The current yield is 2.4%, so while it’s not a pure income stock, it’s still about 1.5 times that of the S&P 500. In addition, shareholders get strong growth potential from the dividend with Diageo.
The stock is trading just under fair value, so we see a modest tailwind to returns from that. All told, we expect to see ~11% total annual returns in the years to come, mostly from earnings growth.
Ambev SA (ABEV)
Ambev is our next sin stock, a company that makes and distributes a variety of drinks, most of which are alcoholic. The company sells beer, draft beer, carbonated soft drinks, malt, and food products throughout much of the Western Hemisphere. The company does not compete in the United States.
Ambev has struggled somewhat with profitability over the years, owed to fluctuating revenue totals from year to year. Looking ahead, we think the company can average 3% growth in earnings from slightly higher revenue, and strong margins. We note that foreign exchange is a big line item for Ambev given the wide variety of geographies where it competes, so results can fluctuate from year to year for that reason.
Ambev pays a variable dividend, so like some of the others on this list, it sees cuts from time to time. The current payout is good for a 3.8% dividend yield, which is quite attractive. It’s equal to about two-thirds of net income, so we don’t necessarily see a huge runway for growth in the payout, but the current yield is nice.
Shares trade at about a 20% discount to fair value, so we think the valuation could produce a roughly 5% tailwind to total returns each year for the foreseeable future.
In concert with modest growth and the 3.8% yield, we think Ambev could produce ~11% total annual returns for shareholders in the years to come.
Altria Group Inc. (MO)
Our penultimate stock is Altria Group, a company that manufactures and sells smokable and oral tobacco products in the U.S. It makes cigarettes under the extremely popular Marlboro brand, cigars under the Black & Mild brand, and moist smokeless tobacco products under brands including Skoal and Red Seal.
Altria has exhibited very strong growth in the past decade, more than doubling earnings-per-share over that time. We think growth from 2022’s very high base of earnings will be much lower at just over 1%, as share repurchases and pricing increases help offset declining tobacco volumes.
Altria is also a Dividend King, having boosted its payout for 52 consecutive years. On that measure, Altria is an exemplary dividend stock. Another way Altria is an exemplary dividend stock is in its massive 8.3% dividend yield. We think payout growth from here is likely to be modest, but Altria has a world-beating yield already.
Shares trade at a 15% discount to fair value, so when we combine the tailwind from the valuation, modest growth, and the huge yield, we see Altria producing better than 11% total annual returns in the years to come.
Vector Group Ltd. (VGR)
Our final stock is Vector Group, a conglomerate that makes and sells cigarettes in the U.S, as well as a real estate business that invests in properties. Vector’s primary business is selling cigarettes, a portfolio that includes about 100 brands, mostly in the lower end of the market that competes on price.
Growth has been quite good for Vector, including 2021 that saw a near doubling of earnings-per-share. We see strong earnings again this year, followed by 3% growth in the years to come.
Vector previously had an unsustainable dividend, but it was cut in 2020 and has been flat ever since. Even so, the stock yields 7.7%, which will drive strong total returns in the years to come.
Shares trade at a double-digit discount to fair value today, and we expect that to help drive total returns to shareholders to about 12% annually in the years to come. That makes Vector our top pick in the sin stock group, offering up a strong combination of yield and value.
Final Thoughts
While sin stocks generally don’t offer a huge amount of growth to investors, they often sport very high dividend yields, and trade for reasonable earnings multiples. This list includes some high-yield names, good value stocks, and a couple of higher growth names. All pay reliable dividends, and all offer good total return prospects for the years to come.
The following articles contain stocks with very long dividend or corporate histories, ripe for selection for dividend growth investors:
- The High Yield Dividend Aristocrats List is comprised of the 20 Dividend Aristocrats with the highest current yields.
- The Dividend Achievers List is comprised of ~350 stocks with 10+ years of consecutive dividend increases.
- The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
- The Blue Chip Stocks List: stocks that qualify as Dividend Achievers, Dividend Aristocrats, and/or Dividend Kings
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500. - The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Best DRIP Stocks: The top 15 Dividend Aristocrats with no-fee dividend reinvestment plans.
- The 2022 High ROIC Stocks List: The top 10 stocks with high returns on invested capital.
- The 2022 High Beta Stocks List: The 100 stocks in the S&P 500 Index with the highest beta.
- The 2022 Low Beta Stocks List: The 100 stocks in the S&P 500 Index with the lowest beta.
- The Complete List of Russell 2000 Stocks
- The Complete List of NASDAQ-100 Stocks
