Dear DTA,
I see a lot of IPOs coming to market right now. I’m thinking of jumping on something. Is there a way to know which IPOs will perform better? Thanks!
-James M.
Hi, James.
Thanks for writing in. We greatly appreciate your readership.
Boy, that’s a good question.
And a tough one.
I mean, nobody has a crystal ball.
I cannot sit here and tell you which IPO will perform better than another, especially if we’re talking about short-term post-listing pops.
But that’s never been my game.
And I would caution you against making that your game.
A lot of high-flying tech companies have gone public over the last few months.
And a lot of these IPOs have been absolutely disastrous for investors.
Why?
I’ll give you one word.
Profit.
More specifically, the lack thereof.
Uber. Lyft. Slack.
Ring a bell?
They’re well-known businesses.
All of them are recent big-name IPOs.
With the media hyping them up, their stocks are now known by investors all over the world.
I’ll tell you what they should be known for.
None of these companies make a profit.
In fact, each one of these companies is adept at not making a profit.
They’re practically money burning machines. Give them your capital, then watch them light it on fire.
If you like seeing your money burn in front of you, go for it.
Indeed, every single stock has gone on to perform incredibly poorly after their respective IPO.
I have a better idea, James.
Invest in high-quality companies that produce reliable and growing profit.
I know. It’s a bit old-fashioned.
Profit is so… yesterday.
But it works.
Just ask Warren Buffett.
He’s been investing in this very old-school way for many years now.
And this has turned him into a billionaire many times over.
While I’m not a billionaire (or anywhere close to it), I’ve been investing like Buffett for almost 10 years now.
And investing in high-quality companies that turn a large and growing profit has revolutionized my life.
Intelligently investing my capital has resulted in the FIRE Fund, which is my real-money stock portfolio.
This has also resulted in financial freedom, which allowed me to quit my job and retire in my early 30s.
I even lay out how almost anyone can retire early in my Early Retirement Blueprint.
Investing in quality and profitable companies can even be narrowed down into a single strategy.
Dividend growth investing.
Fellow contributor Dave Van Knapp gives you the entire rundown on what this strategy is, why it’s so effective, and how to successfully implement it.
Check out his Dividend Growth Investing Lessons for more.
This strategy is so simple, yet so effective.
It basically involves buying shares in high-quality companies that pay reliable and growing cash dividends.
These reliable and growing cash dividends are funded by reliable and growing profit.
Dividends are the “proof in the profit pudding”.
You can find more than 800 US-listed stocks that have raised dividends each year for at least the last five consecutive years by perusing the Dividend Champions, Contenders, and Challengers list.
You won’t find Uber on that list.
That’s for sure.
But you will find a number of world-class enterprises that are doing something that Uber isn’t.
They’re producing gobs of growing profit. And they’re paying their shareholders rising cash dividend payments.
These rising cash dividends can be used for a variety of things, like reinvestment or paying bills.
I’ve personally built my financial independence upon these dividends.
The growing cash dividend payments I collect from the dozens of companies I’m invested in pay for my essential expenses in life.
While Uber is lighting investors’ money on fire, I’m able to live life on my terms because wonderful businesses are out there being more careful with my capital and returning a portion of profit back to me.
Unprofitable IPO, or a world-class enterprise paying you growing dividends?
The choice is yours. But I’d say it’s a pretty easy choice to make.
If you decide on dividend growth investing, we’ve got you covered with a ton of content devoted to fishing out the best ideas.
One example is my very own Undervalued Dividend Growth Stock of the Week series.
Every Sunday, I highlight an attractive long-term investment opportunity for investors.
Each article contains a body of research on a stock’s fundamentals, competitive advantages, dividend metrics, and valuation.
It’s only when a high-quality dividend growth stock appears to be undervalued that I put an idea in front of the community.
They’re compelling ideas. And this research is totally free.
Your investment choices are up to you, James.
But I think you should be careful here.
IPOs might be exciting.
But losing money isn’t.
I’d rather be a boring investor collecting growing cash dividends.
That’s exciting to me. Financial independence excites me.
Regardless of what you choose to do, I’ll leave you with one last piece of advice.
Start today.
I wish you luck and success.
Jason Fieber
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Disclaimer: Jason Fieber is not a licensed financial advisor, tax professional, or stock broker. Please consult with a licensed investment professional before investing any of your money. If your money is not FDIC insured, it may decline in value. To protect the privacy of our readers, any names published in this article are under aliases. In addition, text may be edited, omitted or paraphrased for grammar or length.