Naughty or Nice Part 2: 5 Delightfully Sinful Dividend Stocks

This is Part 2 of a two-part series on “Naughty and Nice”  dividend stocks.

In the last article, I gave you five socially-responsible stock picks that you could feel good about owning.  Now, we’re going to go a very different direction.  In this article, I’m going to give you five delightfully naughty dividend-paying stocks to consider.

I’ll start with a confession: I love sin stocks, and I always have.  Because they are politically incorrect, companies in the tobacco, alcohol and defense industries tend to trade at lower valuations and higher dividend yields than the broader market.  In effect they are perpetual value stocks, and investors with no qualms about investing in stocks with social stigmas attached to them benefit from this pricing.

For a longer explanation on the virtues of being bad, see “The Price of Sin.”

As I’ve written before, “Not All Sin Stocks are Created Equal,” and not all vice investments are strong dividend payers.  But the following five stocks all pay current yields well in excess of the market average.

I’ll start with a sin stock standard, American tobacco giant Altria ($MO).  As the poster boy for Big Tobacco, Altria is probably the most hated company in history. If Altria were a movie character, it would be Darth Vader.

It also happens to be the most profitable investment in history, according to Jeremy Siegel’s The Future for Investors.  Dr. Siegel’s calculation assumed the reinvestment of dividends, of course.   And when you buy shares of Altria, you should accept that you are buying the stock specifically for its dividend because the company’s business is in long-term terminal decline.  Cigarette smokers will continue to light up, but their ranks are not growing and cannot be expected to.

At current prices, Altria yields 4.70%.  This is a little lower than I would normally like to see for a tobacco stock, but it still makes Altria one of the highest-yielding stocks in the S&P 500.

Some of the best values in the vice sphere are in the “merchant of death” category, and the next stock is one that I covered in “Five Smart Money Dividend Stocks” as a stock owned by Magic Formula guru Joel Greenblatt: defense and aerospace firm Northrop Grumman Corporation ($NOC).

Northrop Grumman makes the sort of toys you might expect to see in a James Bond movie. Its aerospace division sells hardware and systems to government agencies for use in various mission areas, including intelligence, surveillance and reconnaissance, battle management, strike operations, electronic warfare, missile defense; earth observation and space exploration.

Northrop Grumman trades for just 9 times expected 2013 earnings and yields an impressive 3.3% in dividends.

Next on the list is one of Northrop Grumman’s competitors, Raytheon Company ($RTN). Raytheon offers integrated defense systems, including integrated air and missile defense, naval combat systems, and intelligence systems.

Raytheon is priced comparably to Northrop Grumman, trading for just 9 times earnings and yields 3.6%.

The entire defense sector is attractively priced at this time, and Northrop Grumman and Raytheon are two excellent dividend stocks.

Moving down the list of all things naughty, we come to booze.  And the single best play in the world of spirits is British-based Diageo PLC ($DEO), the largest and most diversified seller of premium alcoholic beverages in the world.

Diageo’s brands include Johnnie Walker scotch, Smirnoff vodka, Baileys Irish Cream liqueur, Crown Royal Canadian whiskey, Captain Morgan rum, Jose Cuervo tequila and many, many others.  The company has been a long-time favorite of the Sizemore Investment Letter for its exposure to emerging markets; Diageo already gets 40% of its revenues from emerging markets, and this number grows every year (see “Diageo: the Ultimate 12 to 18 Year Play”).

Diageo is a current constituent of the Mergent International Dividend Achievers Index, meaning the stock has a long history of raising its dividend, and currently yields a respectable 2.0%.

Another stock in the alcohol sphere I like is Dutch mega-brewer Heineken NV ($HINKY).

The global beer market is dominated by the Big 4—Anheuser Busch InBev ($BUD), Heineken, SABMiller ($SMBRY) and Carlsberg—though beer sales have been stagnant in the company’s core American and European markets.  Sales are booming in emerging markets, however, and the Big 4 continue to gobble up small local brands with reckless abandon.

Heineken is unique among Western multinationals in that it is not only a great indirect play on rising incomes in the developing world, but it is a great play on the development of Africa in particular.  Heineken already gets roughly a quarter of its revenues from Africa, and this percentage will only rise over time as the African middle class grows and develops.

Heineken pays a decent dividend of 2.1%.

So there we have it.  Investors looking to build an income portfolio have their choice of both naughty and nice dividend-paying stocks.  I recommend they take their pick of both.

Disclosures: Sizemore Capital is long MO, DEO and HINKY. This article first appeared on InvestorPlace.



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