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4 High-Yield 'Sin Stocks' You Can't Afford To Ignore

 May 17, 2012 01:24 PM
 


(By Street Authority)To many people, it's hard to justify investing in companies that make such unloved products as tobacco, weapons or even alcohol. But income investors can find lots of reasons to like tobacco and alcohol stocks, namely their defensive nature and the fact that they typically perform quite well.

Despite well-known health hazards, there are still plenty of people who smoke and drink, making demand for these products quite reliable. In addition, many of these stocks pay enticingly rich dividends. That's because, like gambling and adult entertainment, tobacco and alcohol stocks fall into a stigmatized niche of the investment universe known as "sin stocks."

Because of the social stigma attached to sin stocks, many endowments and pension funds shy away from owning them. Few institutional holders help to keep the prices of these stocks reasonable and dividend yields high. The fact that sin stocks often have all the best characteristics of a value stock makes these excellent long-term investments.

Here are four sin stocks whose steady performance and generous yields are nothing to be ashamed of...

1. AmBev (NYSE: ABV)
Yield: 4%

AmBev is the leading brewer in Canada, Brazil and most of Latin America. Its portfolio of globally-recognized brands includes Brahma, Skol, Antarctica, Quilmes, Labatt, Pilsen and Pacena. This company is benefiting from the rise of a middle class in Latin America and the increasing appetite of these consumers for premium beers.

AmBev is owned by the much larger Anheuser-Busch InBev (NYSE: BUD), but trades separately as an American depositary receipt (ADR). The company has more cash than debt and generates enormous cash flow totaling $6.8 billion during the past 12 months.

Return on equity is impressive at 34%, and earnings and dividend growth are reliable. In the past five years, AmBev has produced 17% yearly earnings per share (EPS) growth and 36% annual dividend growth. Payout is reasonable at 43% of cash flow. AmBev currently pays a $1.44 annual dividend that yields almost 4%.

2.


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