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Study after study shows that returns that you get from investing in sin stocks is typically higher than the returns you get from investing in other stocks. Why? Let’s answer the question, “Why are sin stocks returns higher than other stocks?

Why Are Sin Stocks Returns Higher Than Other Stocks?

In the previous question and answer (What are sin stock returns like?) we quoted from a few studies that showed how sin stock returns are higher than other investments. That’s good news for investors. But the curious investor should want to know why that is.

There are many possible reasons but we’ve found 5 key reasons why sin stocks provide solid returns.

#1. Harmless indulgence. The first reason is that most sin stocks are thought to be harmless indulgence. Alcohol and tobacco (and even gambling) are thought to be enjoyable ways to spend your time. Therefore, people don’t mind spending money, even when they don’t have a lot, on beer and cigarettes. Have you ever met a person who complains about being broke yet smokes a pack a day? They may indeed be broke but they’ll find money somewhere for cigarettes. In these people’s minds, their smokes or drinks are just little indulgences (that they can’t live without)!

Even in a recession, the so-called Lipstick Effect is at work here. (The Lipstick Effect is the theory that lipstick sales increase during a recession because people are willing to spend more on small, affordable indulgences when they’re cutting back elsewhere. So, whether people are enjoying good financial times or bad, sin stocks make life a little more enjoyable.

#2. Key Necessity. The second reason is almost the opposite of the first reason, yet it applies to many sin stocks as well! As you read above, the “broke smoker” may view his or her cigarettes as an indulgence but it is, in fact, a key necessity in life.

Other sin stocks fall into this category, as well, including defense sin stocks and crime sin stocks, which people view as key aspects to their personal protection — with defense companies supplying militaries and personal protection, and crime sin stocks for prisons.

#3. Perennial Demand. Whether a sin stock is thought to be a harmless indulgence or a key necessity to life, there is perennial demand for sin stocks. Smokers, drinkers, and gamblers rarely cut back at certain times of year; militaries and prisons are not seasonal businesses. As long as people are around, these products and services are required… and for the most part, their requirement is not declining or even steady; it increases. And adding to the perennial demand is the temporary nature of the product: alcohol is consumed, cigarettes are smoked, slot machines keep taking in change, bullets are one-shot-only items. Demand is maintained by the obsolesce of the product.

#4. Low Costs. Some sin stocks offer high returns because they are actually low cost. Not all are low cost but cigarette companies, for example, are limited in how they can advertise, so their marketing costs are lower than other companies. Many of these companies are large, have also been around for a while, and they acquire other companies, too, which give them brand recognition and economies of scale help to drive down prices too.

#5. Big Moat. We’ll talk about this one more in-depth later but there’s a big moat around sin stocks — in other words, it’s harder for competitors to enter this industry. Sure, it’s not impossible but it is challenging. You’re not likely going to see a dozen new cigarette companies spring up overnight in America, for example. For that reason, there is less competitive pressure to reduce prices, which allows sin stock companies to keep prices as high as the market will bear.

It’s possible that there are other reasons why sin stock returns are higher than other stocks. But these are the big 5 reasons we’ve found that make sin stock returns so compelling.

DISCLAIMER

Nothing on this site is a recommendation because, hey, I can't read your mind and I don't know what you have in your portfolio, and I'm not a licensed financial advisor. So never EVER trade without doing your due diligence. If you want more information about this fascinating topic, please check out the Sin Stocks Disclaimer page which basically says the same thing but more emphatically.