Four ‘sin-free’ UK dividend stocks

Four ‘sin-free’ UK dividend stocks
Passive income investments you can feel better about.
Dan Lane
July 12, 2021

You want to buy shares that produce consistent, reliable income streams, and you don’t want to feel bad about where it all comes from. Sound familiar?

We’re more concerned than ever about how our returns are generated and what our invested money is going towards.

But it wasn’t always like this.

It’s not that long ago that fund managers trotted out a variant of the line “I’m not paid to exercise ethical judgements, it’s my job to get the best return I can for my investors.”

It would only be a short while before we all realised sustainability and business viability go hand in hand. 

But, with an index full of pharma, mining, weaponry and vice stocks like tobacco and alcohol, matching your morals to your money is easier said than done. Especially as some of the least sustainable examples pay some of the highest dividends.

Is it even possible to get an income away from the sectors of sin?

Here are a few options that might fit the bill. They are an illustration of the theme here and not a suggestion or recommendation that you buy or sell any of the securities mentioned. 

Remember that everyone has their own goals and unique financial circumstances. These, along with your tolerance for investment risk and time horizon, should inform the mix of assets in your portfolio. 

Our resource hub for investing in the stock market might be able to help make that blend a bit clearer for you and our guide on how to invest in stocks is a great start for first-time investors. And if you are still unsure of how to pick investments, speak to a qualified financial advisor. 

Civitas Social Housing REIT

Civitas Social Housing invests in projects with long-term leases, whose income is ultimately earned through housing benefit payments from central government.

Despite the dividend dearth elsewhere in 2020, when payments from oil and tobacco firms were dropping like flies, the mid cap trust managed to collect its full rent book.

It might carry a hefty premium but for it, you currently get a yield just short of 5%.

Target Healthcare REIT

Another REIT in the space is Target Healthcare, which invests in UK care homes. 

With life expectancies lengthening thanks to higher standards of living and constant advancements in medical technology, the time we spend in our third age is increasing too. 

This means care homes are likely to have residents stay for longer, putting pressure on those already oversubscribed.

The trend could mean more consistent income streams from residents as well as the opportunity to invest in more care homes as projects pop up to service our older communities.

The trust trades at around a 5% premium but for that investors get a current dividend yield close to 6%. 

Read more:
2021’s top dividend stocks aren’t what you think
The green energy stock bubble
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The Renewables Infrastructure Group

Renewable energy trusts with portfolios of environment-first projects, can offer attractive opportunities for income investors like predictable revenue streams, and relatively little sensitivity to changes in the economic cycle.

The global shift towards renewable energy sources is also likely to see governments around the world focus even more heavily on their journeys towards carbon neutrality.

The Renewables Infrastructure Group invests in around 70 energy projects, mainly in solar, wind and battery storage technology throughout Europe and, unlike a lot of other strategies, pays a quarterly dividend. 

A 10% premium might look expensive but a 5% dividend might suit income hunters attracted to the sector.

Greencoat UK Wind

And if you’re particularly interested in investing in wind energy there is the Greencoat UK Wind trust. 

The mid cap market constituent invests in the UK’s wind farms and currently has a dividend yield above 5% too.

ESG blacklisting isn’t always the answer

These firms have ESG credentials coming out of their ears but that’s not to say blacklisting firms based on ethical concerns is absolutely the best way forward. 

Take that to its logical conclusion and those undesirable firms will have no shareholder voices asking them to change. 

Yes, they may be regulated out of existence or fined up to the hilt but, if they go down, think about the volume of UK pension savings that will go with them.

As uncomfortable as it may be, getting into the firms from whom we need to see change could be an equally valid way forward.

ExxonMobil got a rude awakening when 0.02% shareholder Engine No.1 (the little hedge fund that could) stood up and demanded a plan to tackle climate change from the largest oil firm in the US.

Had it not been there, Exxon only really had the regulator to battle. Dutch courts told Shell to get a move on with its own green transition but think about how much faster they’d have to move if ESG-heavy dividend hunters made them.

When is a sin stock not a sin stock?

Of course, there are firms out there paying decent dividends that don’t scream global destruction or seem to be ESG saviours either.

But without those specific ESG aims, a lot of companies can fall in and out of the category just by coincidence. They might slip into a positive rating on the environmental side but not have a direct objective to get there. 

That can mean they stop being so good the next time an analyst has a look - it’s not one of their immediate aims after all. The only way to be comfortable that your companies reflect your approach to investing is to look at their core objectives, not just if they meet the grade after the last quarter’s results.

That goes for their corporate governance standards too and how well they treat the societies in which they operate. It’s easy to rule firms out on personal ethical concerns but introducing long-term sustainability to your portfolio might take a bit more effort.

How do you source sustainable dividends? Let us know on the community forum:

Keep more of your investment gains with a tax-efficient savings and investment account. With a stocks and shares ISA or Freetrade personal pension, you control where your money is invested while benefiting from tax advantages. To help you get started, we’ve written an ISA explainer and a guide to how SIPP pensions work

Important Information

This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice.

When you invest, your capital is at risk. The value of your portfolio, and any income you receive, can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.

Eligibility to invest into an ISA and the value of tax savings depends on personal circumstances and all tax rules may change.

Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).

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