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

16 comments:

  1. Excellent web site, fantastic level headed and common sense, thank you. I may have missed this topic but does your investment philosophy have any room of fixed income vehicles or do you feel 100% investment in equities is the only way to go?

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  2. I always find it interesting when the moral/ethics argument comes up. I highly doubt you can find one company that no one anywhere has some kind of moral/ethical stand against them. Tobacco companies sell products that can hurt their buyers, but is that any worse than a medical/pharma company charging lots of money for their products that help fight/delay the issues caused by tobacco use? Even the beloved Apple has issues as their products require precious metals that are obtained from cheap foreign labor and the huge mining operation has its own issues. You'll do much better in the long run focusing on the fundamentals of each business and where/how they will grow and churn out profits 10, 20, 30 years from now. I personally don't invest based on moral/ethical grounds but I also won't tell anyone else they can't do so if they want to.

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  3. Thank you: finally someone with some common sense. I totally agree: the point of investing is to make money, not to be a judge of what's wrong and what's right. After we've made money we can always donate some profits to worthy causes!

    Investing based on ethics as one's main criteria is a sure way to lose money. The stock market doesn't really care about what's morally right or wrong: it cares about what is financially profitable (or unprofitable).

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  4. I realize that it is everyone's choice to invest in which ever stock they choose. Having been a smoker in the past I absolutely detest tobacco now. I've experienced first hand how difficult it is to quit smoking this extremely addicting drug. It's been proven that tobacco has directly been the cause of many deaths over the centuries. I know it is a legal substance but would it be legalized if it were a new discovery? For sure not! I will not judge others decisions on purchasing tobacco stocks but I will not invest in something that I wish would fail. I believe tobacco is the only industry that causes more deaths than it employs.

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  5. Yeah I totally agree. PM is always up there when people talk about ethical investing however I don't really consider PM to be unethical at all. It is really subjective. What about all the people that PM employs? The employees have their family to feed and help develop society they are in. Other companies are the same and you can always find any companies that are a lot worse than PM if it is managed unethically regardless of what industry it is in.

    BeSmartRich

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  6. Isn't there an ethical difference between supporting something like smoking and profiting from it? The tobacco company shares are already in the public float so *someone* is going to profit from the earnings of the company. I'm not hurting anyone, so why not me? That said, I would think twice before providing investment capital to a tobacco company so that it can start or expand its business. In that case I could well be hurting people.

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  7. The article seems to imply that everything is relative so there is no way to judge whether something is ethical/moral or not. Therefore we ought to ignore these concerns and just concentrate on profitability of the business. I respectfully disagree. Right or wrong, good or evil are not relativistic concepts. If they were then we could never say wrong thing about anything. We would have to accept every evil thing, because it's relative, depends on the point of view of a person. Can we ever say that stealing is good or harming others is good? Of course not, even if there are people who believe it is.

    The examples you've given aren't the same. Smoking is bad for health, always. You're basically profiting from addiction. Eating at McDonalds may be fine, it all depends on how often you eat there, your lifestyle, size of the meals etc. Defense, we need army to protect us so it's not black or white. Stealing land from Native Americans, i consider this a joke :)

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  8. You brought up some good points. It is difficult to name ethical companies and being 100% sure they really are. However, it is fairly easy to find companies that do more good or less harm. Of course, in the end it all depends on one's values and principles, but some values and principles are shared among the majority of people in our society.

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  9. Right on DGI! Must say I enjoy your posts and respect your common sense, especially about the morality of investing. I read every day. Keep up the good work!
    Long MO, PM, and big oil!

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  10. I love the article as always!! Interesting news this morning, WMT is raising their wages a lot but only raising the dividend 2%! I think I'm ok with that...Give a little, take a little...curious to see how you will take this news and whether you will sell or hold.
    We have seen companies slow down the growth only to raise like crazy afterward. MMM, SHW come to mind....
    J

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  11. Like Bernie I don't like tobacco, which certainly colors my opinion. But I don't have a problem *ethically* with the companies you list; I'll leave corporate ethics up to the courts and lawmakers. But when companies, and particularly industries, have a lot of ill will directed at them, I view that as a potentially serious risk to the company. Tobacco, in my mind, has nowhere to go but down. That may take some time, and there may be profits to be had in the meantime, but I don't trust the industry to succeed long term.

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  12. I personally have a problem with investing with some of the companies you listed but I would not call it a moral stance against them. My reluctance to buy in WMT, MCD, or PM stems from advice of investing in companies you like as a consumer. And those three companies are places I never go as a consumer For example I don't have a problem with WMT's business operations but I absolutely hate everything about being in that store and it is always the last place I would go to buy anything, so I am probably missing out a good dividend stock but given my feeling open entering one of their stores it doesn't make sense to me to become a partial investor in something I dislike so much.

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  13. Great article! It is funny, I wrote a stock analysis about PM ago and many of the comments mentioned that they will never invest in a tobacco company for personal reasons. Big tobacco companies seem to be the most polarizing in this context due to addictive nature of the products and the fact that some way or another everyone has been touched by the product.

    In my opinion, you can find something ethically wrong in the majority of the companies out there, whether the information is public or not. I think it comes down to each individuals tolerance level for the issue at hand and their personal beliefs. What about oil companies that have oil spills on a regular basis, companies that take advantage of cheap/young labor overseas, heavy polluters, etc? My investing strategy is focused on building companies that have historically paid a strong, growing dividend and I tend to never really focus on the potential issues (After all, I own PM and BP).

    I like your example about buying Coke. That's why I could never own a pawn shop or a business like that, because I would hate buying products from people that are in need of cash. That would be a major dilemma for me because helping the individual out would conflict with your business' bottom line. Tough industry for sure.

    Thanks for the article! Keep up the great work.

    Bert, one of the Dividend Diplomats

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  14. Choosing profit above all else is a moral choice. There is no way not to bring your own morals into a decision. In every decision we make, we create the world in which we live. You just have to ask yourself what kind of world you would like to live in, and make choices towards that world. This is what we call morals. If you enjoy a world where people are addicted to smoking, causing them serious harm and often death, and you encourage that behavior, then that is the world which you will get. The way other people make choices does not take away responsibility for your own choices. Making a choice about what to invest in is not about trying not to be objectionable to other people, rather it is trying to create a world in which you yourself want to live. Using the best available understanding of the situation, what do you want to do? If you are trying to please everyone, you have just strayed into neediness, not morals.

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  15. It was interesting to read this post and the comments because I have often considered the morality of investments in the past. I do think that one of the worst practices of corporations today is donating to various pet causes/charities. While some of these charities are pretty universally unobjectionable, others can be very objectionable, as the case of Warren Buffett illustrates. I simply do not understand the financial reasons for corporations to alienate a portion of their shareholders or customers by giving to causes that are morally objectionable to many people. What should they do instead? I propose that corporations cease all charitable giving. Instead, they should return more money to shareholders who then can make their own determinations about charitable giving.

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  16. Hello DGI,
    All you have to do is mention tobacco and you get plenty of comments! I've owned Altria since 1999 and added to the position many times. I hold all spin-offs, PM, KRFT and MDLZ. While many say they will never invest in tobacco companies I will say that my only mistake in investing in Altria over the years was in not buying enough of it. I've made this mistake again and again, it is simply put...my greatest investment ever......!

    All the best,
    A

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