) -- If you're an income investo, and you don't own "sin stocks," you're doing something wrong.
Don't let the name fool you -- sin stocks aren't in the business of burning down old folks' homes. Instead, they're companies that operate in industries like alcohol, tobacco, gambling, and defense. And as an income investor, sin stocks could be the most wholesome addition to your portfolio.
In a lot of ways, sin stocks are purpose-built income machines in good times and bad. For starters, sin stocks tend to be businesses that provide a stress outlet for consumers. As a result, recession resistant revenues and sticky customer bases are the norm. The devil's in the details with sin stocks; because these firms generally sport wide economic moats and deeper margins than traditional consumer plays, sin stocks benefit from an extra qualitative boost that you can't find in any other group right now.
When investor anxiety is ramped up, sin stocks really shine. Just take a look at what they've done in anxiety rally the past year: while the S&P 500 has rallied an impressive 15.9%, the aptly named
(VICEX) had climbed 22.2%.
But our focus today is dividends, not just capital gains. And instead of chasing payouts, we'll try to step in front of the next round of sin stock payout hikes.
Over the last three and a half decades, dividend stocks have outperformed the rest of the S&P 500 by 2.5% annually, and they outperformed nonpayers by nearly 8% every year, all while paying out cash to their shareholders, based on data compiled by Ned Davis Research. The numbers are even more compelling when looking at companies that consistently increase their payouts.
For our purposes, that "crystal ball" is composed of a few factors: namely a solid balance sheet, a low payout ratio, and a history of dividend hikes. While those items don't guarantee dividend announcements in the next month or three, they do dramatically increase the odds that management will hike their cash payouts.
Without further ado, here's a look at
in the next quarter.
Philip Morris International
As the world's second largest tobacco company,
Philip Morris International
) is the prototypical sin stock. It boasts recognizable brands, a sticky customer base, and a hefty dividend payout -- and the payout looks due for a dividend hike. As I write, Philip Morris International currently pays out a 85 cents each quarter, adding up to a 4.05% yield.
Philip Morris owns almost 30% of the world's tobacco market. And much of that success is thanks to a single iconic brand: Marlboro. The firm has owned Marlboro (as well as second-tier names such as L&M and Parliament) internationally ever since
) split up its international and domestic operations. Between the two markets, PM owns the more attractive franchise by far. After all, the international market is the only one that's actually growing.
While the U.S. market for tobacco products is rife with regulation and demographic shifts are turning away from smoking, international tobacco sales are up -- especially in emerging markets. Premium positioning in markets like India, China and Indonesia translates into substantial cash flows for PM investors. And while the strength of the dollar has been a challenge post-2008, the potential for a
taper could strengthen this stock's payout in 2013.
While gamblers in Las Vegas are focused on the payouts on the casino floor at
), I'm more interested in this stock's dividend payout -- there's no gamble there. The $14 billion casino resort operator currently pays out a $1 per share dividend each quarter, adding up to a 2.8% dividend yield at current price levels.
Wynn has benefitted from a rebounding economy in Las Vegas. The firm's Wynn and Encore resorts are two of the newer properties on the strip, and their high-end positioning keeps VIP business coming into the door. Vegas, though, isn't Wynn's cash cow anymore. China is. Today, around 70% of revenues actually come from Macau, the high-end Chinese gambling district. Macau is Wynn's crown jewel in large part because the firm is one of the few that's been granted a gaming license from the government: Wynn has two properties in Macau, with a third on the way.
Healthy levels of profitability have translated into a $2.2 billion cash position for WYNN -- enough to pay for around 15% of the firm's market capitalization. Concentrated ownership from founder Steve Wynn should align management's incentives with investors, and increase the likelihood of a dividend hike.
) is enjoying strong tailwinds thanks to increased consumption of its namesake spirits. The firm is the name behind Jim Beam and Maker's Mark bourbon as well as Sauza tequila, Pinnacle vodka and Cruzan rum. Since spinning off from what was then Fortune Brands in 2011, this stock hasn't done much in the way of price, but it has made leaps and bounds fundamentally. That financial improvement paves the way for a dividend boost.
Beam is well-positioned in the spirit business. Liquor consumers are sticky. Because BEAM owns some of the most attractive brands in the business, it's less likely to see brand attrition than others. And more recently, the embrace of drinkers' demand for "craft" alcoholic beverages has provided a fast-growing opportunity for the firm: a line of small-batch bourbons. That same small-batch approach could spill over to the firm's other liquor brands in a very positive way; Beam already has a winning model to copy, after all.
In the last few years, Beam has essentially halved its debt, and it's kept balance sheet liquidity very healthy. As a result, income trends look very strong -- and more of that income is available for shareholder payouts rather than bank obligations. While the firm's 1.5% dividend payout it far from high-yield, investors should expect a raise in the coming quarters.
Molson Coors Brewing
Molson Coors Brewing
) operates in a different corner of the alcoholic beverage business: beer. The $9 billion brewer is one of the biggest in the world, with brands like Molson and Coors as well as Blue Moon, Keystone and Miller Lite (the latter through a joint venture with
(SBMRY: Pink Sheets) here in the U.S.).
Molson Coors is engaged in a battle of the big boys - as the second largest brewer in Canada and the U.S., the firm primarily competes against top-rival
Anheuser Busch Inbev
) for market share. Like BEAM with its small barrel bourbon line, TAP has poured resources into the craft beer segment, the fastest-growing area in the alcoholic beverage space. While that's not likely to materially change its business, it should provide a welcome margin boost.
Beer sales tend to ebb and flow with the broad economy. In 2013, with consumer discretionary spending on the upswing, beer spending should grow in kind. For TAP specifically, the possibility of a falling dollar bodes well for the firm's large international exposure -- and its ability to hike its payout.
Right now, TAP pays a 32-cent dividend for a 2.6% yield.
International Game Technology
2013 is panning out to be a great year for investors in
International Game Technology
). Shares of the mid-cap slot machine maker have climbed more than 34% since the calendar flipped over to January. Now a boost to IGT's 10-cent dividend payout spells even more upside for the second half of the year.
IGT is the biggest manufacturer of casino gaming equipment in the world. Calling them "slot machines" is a little bit of a sleight -- the firm's digitally-powered machines are designed to provide gamers with a much more immersive experience than the old mechanical spinning wheels ever could. And the technology and branding in IGT's games translates into an economic moat for investors. It's a deep moat too: IGT currently controls around 20% of the gaming equipment market.
The debate over online gambling presents a big potential tailwind for IGT, as it opens a big market for the firm's social gaming business. Even as-is, though, IGT's numbers are attractive: this sin stock earns net margins deep in the double digits, it carries a manageable debt load, and it sports a perfunctory earnings multiple. With an impressive track record of boosting dividend payout each quarter, expect to see this stock's 2% yield get hiked sooner rather than later.
To see all of this week's Rocket Stocks in action, check out
-- Written by Jonas Elmerraji in Baltimore.
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At the time of publication, author had no positions in stocks mentioned. Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to
. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in
Investor's Business Daily
, and on
Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation. Follow Jonas on Twitter @JonasElmerraji