Wednesday, February 18, 2015

Is Ethical Dividend Growth Investing Possible?

I have a lot of smart readers, that check my articles every single day. I like interacting with them, and feel blessed that I am sharing their journey into learning more about investments.

I had a reader who mentioned that they had an issue with investing in tobacco, oil and defense companies. He then asked me for a list of dividend stocks, which are not ethically challenged. I thought about this for a second, and responded that I cannot of a single investment, that no one can challenge on some sort of ethical grounds.

The ethical investing dilemma always comes up when I have analyzed Altria (MO) or Phillip Morris International (PM) on this site. Every single time.

I am not smart enough to say that my moral grounds are better than your moral grounds. I also understand that just because I find something to be immoral, that doesn’t mean others believe it to be immoral. In other words, you cannot say that you won’t invest in tobacco or defense stocks based on your moral grounds that they hurt people, and then go ahead and invest in a company that sells food for example or buy a farm, which could be investments that violate someone else’s principles. Food companies can be challenged by anyone, because they are blamed for the obesity epidemic in the US. In reality, I personally disagree with this statement, because people’s sedentary lifestyle is the thing to blame. Nevertheless, someone can make the argument that obesity related illnesses claim the lives of hundreds of thousands of Americans every year.

Investing in US farmland could be an ethical issue as well, because it violates the principle of thou shalt not steal. How is buying farmland stealing though? Well, up until the early 1600’s, the territory of the Lower 48 states was inhabited by Native Americans. When the European settlers came to the US, they systematically pushed Native Americans out of their lands, and then killing many in the process – that includes children also.

Even Warren Buffett, the model for behavior in corporate America can be used as an example that violated someone’s moral grounds. Did you know that he has supported Planned Parenthood clinics? If you are pro-life supporter, this should be a moral/ethical reason against investing in Berkshire Hathaway and against every using one of its products or services. In addition, Berkshire Hathaway has donated money to causes such as this one. This had caused an uproar from some shareholders, which ended the stage where the company donated money to charities designated by shareholders. If you are against abortions, then it is very likely that you would have never invested in Berkshire Hathaway, if you were emotionally investing based on "ethics". ( as a side note, I am not saying pro-life or pro-choice is better)

These days Wal-Mart Stores (WMT) and McDonald’s (MCD) receive a lot of negative publicity, because they pay their low-skilled employees low hour wages. Many are focusing on the fact that a person working full-time at either places is overworked, and is not paid a liveable wage. Therefore, many consider both companies to be evil, and they should therefore be ethically against investing in those companies. On the other hand, they are forgetting that most retail stores and fast food/restaurant chains pay low wages to their employees. Costco (COST) is the sole exception to the trend. Other than Costco, I doubt that the mom and pop stores that Wal-Mart put out of business, or the Targets or competing neighborhood grocery stores ever pay a higher wage to their store employees. I could argue that Wal-Mart is saving families thousands of dollars each year. Plus, they create opportunities for people that mom and pop might not provide. In addition, retail jobs are low skilled, and can be done by almost anyone. Because there is not specialized knowledge required, it is not at all surprising that wages are low. And do not forget that Wal-Mart sells goods that are most likely made in the same factories that most of the items you shop at other stores. Chances are that mark-ups are the major difference. If wages were raised, then a lot of low skilled employees will be out of jobs. Automation will reduce the need for certain skills at higher wages.

My first job ever was at a McDonald’s (a long long long time ago). Working there really helped me realize I don’t want to work there my whole life. This is why I invested the money I earned there in my education, and learned skills which are valued and sought after in corporate America. They provided me with opportunity – the mom and pop stores I applied to didn’t want to hire me. So I am glad they went out of business. But i liked the way McDonald's ran its operations. This is why I am an investor in the company - I do not see things as black and white unlike so many other individuals out there with polarizing views on the world. It is not perfect, but it is also an easy target for hatred because of its size.

Another unethical thing could be simply purchasing shares in companies when they sell-off. I like to focus on quality companies, but do not like paying top price for them. As such, I find it much more appealing to buy Coca-Cola (KO) when it has sold off by 20 - 25%. This is because such a decline could lead to shares selling at attractive valuations. However, if you purchased shares at a discount from the high, chances are that someone else sold it to you. What if this person sold to you, because they had a margin call, and simply had to sell. For example, during the financial crisis of 2008 - 2009, many people sold all of their stocks because they were unemployed, and needed money to live on. Selling their shares might have been the only choice for them to get money, in order to survive, no matter if they sold at the bottom. Or what if this person had a medical emergency, and had to sell their Coca-Cola stock, in order to pay for the cancer treatment of their small child? Would taking advantage of a fellow human being in dire need by buying shares at ridiculous discounts sound ethical or moral?

The goal of this article is not for me to tell you what is right and what is wrong. The goal is to show you that anything you say and do could be viewed as violating someone’s ethical rules. I am personally fine with someone smoking and drinking and eating fast food, because this is their choice. As long as you are not hurting others, and you are not breaking any laws, this is an activity you can do. Plus, smoking provides a lot in tax revenues, which can be used for a lot of society's good.

Investing for a profit is very difficult as it is today. By applying arbitrary rules in investment selection, that have nothing to do with the underlying profitability of the business, you are essentially limiting yourself to never investing in anything. Your goal as an investor is to earn money, and not to be a moral/ethical arbiter for the world. If you don’t want to invest in certain companies, don’t do it, but you have to realize that what you see as moral or ethical, might be viewed as unethical by someone else and vice versa.

Full Disclosure: Long PM, MO, KO, MCD, WMT

Relevant Articles:

Six Dividend Paying Sin Stocks to Consider
The Security I Like Best: Philip Morris International
Altria Group (MO): A Smoking Hot Dividend Champion
Should Dividend Investors be Defensive about these five stocks?
Rising Earnings – The Source of Future Dividend Growth

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