To Coke or Not to Coke

Here’s an ethical issue on which I invite your input because I have no clear-cut answer: Should you invest in a great company that makes killer products?

I’m not talking category killer like Apple; I’m talking killer killers, like cigarettes, guns and sugar-laden foods and drinks.

For those opposed to smoking, for instance, it’s not a big step to go from being anti-tobacco in a product sense to being anti-tobacco on a larger scale, especially if you have lost friends or family members to lung cancer. I hate smoking, and when I walk past many of New York’s smoke-free office buildings, I have to restrain myself from screaming, “Are you out of your $#@in’ minds?” to the twenty-somethings huddled out front, rain or shine, hot or cold, getting their fix. By the way, if those same smokers took the $180 or so that it costs per month for a half-pack-a-day habit in New York and invested it in a plain vanilla index fund earning just 2% a year, they’d have about $90,000 in 30 years–and they might still be alive to enjoy it.

On the other hand, consider the 4+% yield of Altria Group (MO ), whose symbol, MO, is a vestige of the days when the company was known as Philip Morris and didn’t hide what they made. I see that yield and think: “If smokers know that cigarettes cause cancer but are going to keep smoking anyway, somebody is going to make money from their idiocy and why shouldn’t it be me?” That, of course, is the motivation of Altria Group executives, who now at least admit after a settlement with the government that they make products that kill; Altria Group is listed on our Best Dividend Stocks list with a DARS™ rating of 3.6.

Soda. Even my daughter the nutritionist will readily admit that a can of the fizzy stuff is in a completely different danger league from a pack of cigarettes. In the past, when soda was an occasional treat and a six- or eight-ounce serving was the norm, having a Coke or a Pepsi once in a while was about as harmful as eating an extra cookie. But the super-sizing of soda and its inclusion in our regular diets have helped spawn an epidemic of obesity and diabetes. There’s no doubt about it, soda is bad for you, and over time it’s a killer.

But colored sugar (or, more accurately, high-fructose corn syrup) water is a profit gusher for Coca-Cola. The company’s gross profit margin is over 66%, although its net is only about 14%, which means that soda may cause corporate obesity too. Still, Coke throws off over a billion and a half dollars a quarter in cash and pays a dividend of 33 cents a share, for a yield of about 3.3%. No wonder it’s Warren Buffett’s second-largest holding.

Even if you don’t drink soda, does buying shares of Coke mean that you are turning a blind eye to the health of millions of people around the world? What message does it send to your children if you profit from a product that makes other children sick, even if not immediately?

I know the freewill argument: Coca-Cola doesn’t kill people, it’s people guzzling a gazillion gallons of Coke who are killing people (themselves). And a nanny state is no answer. Still…

Interested in seeing a comparison between Coca Cola (KO ) and Pepsi (PEP )? Click here.

Many investors have come up with a solution to the ethical dilemma I’ve posed by investing in mutual funds that call themselves socially responsible or socially conscious. Investors can choose from funds that screen companies using a variety of criteria, and research has found that many SRI (socially responsible investing) and ESG (environmental, social, corporate governance) funds do as well as or better than their conventional counterparts.

Smoking? Soda? What do you think about the ethics of investing in companies that pay well, but are not doing good for the consumer? Perhaps you’re wondering about what other socially irresponsible companies with high returns you can add to your portfolio?

You can also read the Dividend.com guide to socially responsible investing here.