Sin stocks

(Stewart ) #1

Imperial Brands was incredibly cheap this week with a huge dividend yield. After that fossil fuels seem a staple for income investors. How do you balance the ethics of your portfolio?

I’ve been avoiding fossil fuels generally - with only small holdings in BP and Shell - but then Exxon Mobil is a significant holding of my workplace pension.

Is it worth a young retail investor (Freetrade users I imagine to be among the more concerned about these matters) balancing reward vs ethics? Or do big funds dealing with millions in sin stocks mean worrying over investing your own wages seems comparatively insignificant? Would those more costly dividends mean you are able to buy more eco-friendly food or give more to charity?

(David Kent) #2

This is something I end up talking a lot with my friends about. They lovingly refer to one of my investments as the unethical portfolio.

I believe ethical firms are getting more attention and inflows due to it being the trend right now, which is good for humanity I suppose?

I’m not a fan of investment purely because a firm is ethical, it’s great to vote with your wallet but that isn’t enough for me. If I want to give selfishly I lean more towards charity than investment as it’s more emotional and personal.

Now a firm that scores well on ESG scale I am interested in. Ethical and social impact I don’t think inherently makes a firm a good investment (lots of extremely poorly ran charities in the world sadly) however firms that make efforts around the governance outperform other firms.

Firms that put in the hard work to make sure they meet the requirements and score well for ESG (logging firm is bad, but if you hire only locals and replant the trees they are good) generally have better controls in place, leading to better management and returns!

In that sense I invest and support firms where they have strong controls and governance in place. Firms that find interesting ways to meet requirements and still protect their bottom line are more agile and innovative (in my personal view.)

That brings me back to my unethical portfolio. I have an investment which is highly emotional for a lot of people and sadly due to American culture sees a jump in share price after tragedies. I feel very at distance with the investment and it’s purely down to getting the best returns and diversification. Would I accept worse returns in favour of a more ethical solution? I guess selfishly I’d need to work out how much return I would be giving up.

I encourage people to look at ESG rated firms because it encourages strong management and transparency, however I wouldn’t shun all typical sin stocks, a lot of the typical oil/gas firms are looking into renewables as a longer term strategy for example.

(James) #3

It’s interesting that as a younger investor you see so much value in stocks that pay high dividends.

Whilst accumulating dividends is one way to grow a capital sum, a more typical strategy for a portfolio for a younger person would tend to have a weighing to stocks in growth companies. The longer investment horizon would allow time for such companies to achieve their potential and the hope is that the benefits from the winners beat the losses from the ones that don’t grow as expected. As an example and definitely not a recommendation to buy, Ocado went from £3 a share to £14 in just over a year.

As a younger investor would normally have an income stream from employment the need for income from dividends is usually less pressing. Dividend income becomes more important once employment income ends, say in retirement, when increasing dividends can form part of a portfolio to hedge against inflation.

It is also important to look at the dividend cover on high yields. This is the ratio between profits and the dividend paid out. If it is not much more than 1 then the dividend being paid out might be unsustainable. Presumably if FT had been around prior to Carillions collapse we could have all lost our money on their shares.

If you are sure that a dividend strategy is the best way to go, there are firms out there paying decent dividends that aren’t running the risk of destroying both the planet and their company. (Look up BP- Deep water Horizon if you are not aware of their past corporate governance issues). Some of these may be well established but on a trajectory for growth and so offer the potential for future dividend increases.

Whilst I have recently diversified into some stocks that pay dividends, I find it easier to find ‘ethical’ stocks among the growth companies.

One final thought. It does amaze me that fund managers have managed to solve the age old philosophical question of what it means to live an ethical life. The last I heard is the question remains open in philosophy and what is ethical for one person might not be for another.

1 Like
(Stewart ) #4

That’s very much my strategy normally when it’s just my wages. I’ve only turned towards dividends briefly having received a lump sum of savings that’s intended for a housing deposit in around 5 years or so. As such a less volatile and more “Buffett” approach is desired.

(Louis Otto) #5

Please tell me you’re allocating at least a part of that into a LISA to gain that sweet sweet 25% bonus?

(Stewart ) #6

Of course, though will have to be another broker for now.


I think it just comes down to how strongly you hold your ethics, and ethics is fraught with tough decisions. The specific question is whether the ethical harm is worth the returned wealth for you.
E.g. tobacco is known to cause cancer but smoking is a choice. Does the ethical responsibility lie with the investor or with the consumer?

To make a reductionist analogy, that’s a like punching someone and then apologising. The apology might make you feel better but it doesn’t undo the harm.
What constitutes harm is entirely down to your own personal ethics. Fossil fuels might be a punch to the environment now but to reach 100% renewable energy in the future we need fossil fuels now so maybe it will eventually be a net gain.