This is the fourth in a series of articles elaborating on the 9 Steps To Build and Manage a Dividend Portfolio.
One thing to ask yourself when you begin building a dividend portfolio is: What do I feel comfortable owning? Some people only feel comfortable owning dividend stocks that align with their own morality, while others are comfortable owning stocks that they don’t agree with. Whichever kind you are, it’s useful to know ahead of time and to invest accordingly.
Socially Responsible Investing
As a shareholder of a company, you’re a legitimate owner of the companies you invest in. You make profits based on what they do. But at the same time, unless you buy stock in an IPO (initial public offering), you’re not actually funding their activities. You do indirectly assist management by buying stock because you drive the stock price up ever so slightly which generally provides positive feedback for management and their compensation packages and success ratings. (It’s one of those things where you won’t make any noticeable difference, but everyone acting as a whole does.)
Companies dealing with tobacco, gambling, alcohol, big oil, and environmental issues are the ones most commonly avoided by investors that seek to align their portfolios with their ethical preferences. Other examples might be defense companies, or companies that have labor practices that some consider to be unfair, like Walmart with many of its employees on welfare programs, or Exxon which has voted down a proposition to add sexual orientation to the discrimination policy every year since its merger with Mobil, and has long-since undone Mobil’s decision to provide benefits rights to partners of gay employees.
Investors will all have different things that they find to be ethical or unethical. When it comes to the topic of socially responsible investing, I usually break down companies into two categories.
Some companies may be fundamentally opposed to your ethics. This means that, the core of the company is dramatically opposed to what you stand for. Perhaps you have family members that died from lung cancer; it’s fathomable you might be fundamentally opposed to Phillip Morris. Maybe you’re a vegetarian, and McDonald’s won’t work for you. Or possibly you’re a staunch pacifist, so Lockheed Martin won’t work for you.
For a company that you are fundamentally opposed to, there’s no realistic possible change that would result in the company’s ethics being aligned with yours.
Some companies may have operations that you don’t necessarily disagree with, but you disagree with how they are going about it. For instance, maybe you respect Costco, but not Walmart, because Walmart is known for not treating employees as well as Costco. Or maybe you advocate LGBT rights, and strongly dislike ExxonMobil’s discrimination policy.
The argument to avoid investing in companies that you are partially opposed to is that if you invest in them, you’ll be benefiting from that which doesn’t meet your ethical positions.
The argument to invest in these sorts of companies is that, as a shareholder, you can vote to change their practices. Of course, you can’t do it alone, but if more people who thought like you invested and voted, change could occur. If those who dislike the company’s practices avoid the stock, the situation is unlikely to change.
Voting as a Shareholder
An advantage of owning individual stocks over index funds is that you get to vote your shares. With the proliferation of index funds, people have largely given up their voice while taking the cash and sustaining stock prices. What more could a board of directors ask for?
I promote shareholder advocacy, because I think it’s an essential part of healthy capitalism. People complain left and right about what corporations do, how much CEOs get paid, environmental damage, and so forth, but then they gladly remove themselves from the decision processes.
The takeaway from this article is that, regardless of whatever ethical considerations you take into account with your portfolio, if any at all, make sure you have a game plan. Make note of which business types, if any, are fundamentally or partially opposed to your ethical viewpoints, and forge a conclusion regarding how you are going to go about investing in these sorts of companies. And lastly, for companies that you do own stock in, you can exercise your right to vote in order to shift the company to what your best possible vision of it is. Healthy capitalism occurs when owners take an interest, and owners as an aggregate have a lot of power.
One difficulty we have is sifting through the concerted efforts made by companies to appear socially responsible. Companies will dump millions of dollars on image improvement but they aren’t going to tell us about the not so nice activities they participate in.
I too am a big fan of shareholder advocacy and encourage everyone to at least read the annual, if not quarterly, financial statements, as well as question shareholder services. More often than not, they are happy to answer questions. I have participated in the campaign that some of the people over on the IV MLP board were doing to request better metric reporting of certain companies. While there have been some roadblocks, it does appear that at least a few of the companies have been making changes in what they are reporting, based in part on our requests.
Great points. One of the reasons I cannot own tobacco stocks is because I can’t countenance earning money from the suffering of others, despite their proven long term success.
I don’t really have a problem investing in any company. At the end of the day, if you don’t own it, someone else will and that person probably won’t have the same views you do. Nothing wrong with taking the cash flow you earn from Tobacco companies and sending it to a anti-smoking group, is there?