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Are IPOs Worth Your Dividend Time?

For investors, there is nothing better than hitting it big right out of the gate. And we’ve all seen the stories.

Early investors rake in the cash and profits as a firm goes public and has its initial public offering (IPO) skyrocket on the first day of trading. You have company founders and insiders becoming instant millionaires and some lucky home gamers getting to go along for the ride.

It’s a beautiful dream. And for most of us, it really is a dream. That’s because most IPOs are more fizzle than sizzle.

And that’s especially true for dividend seekers. For the most part, IPOs and those offerings catering around dividends aren’t all they’re cracked up to be. Those investors seeking stable income might want to look elsewhere for big-time profits.

Why don’t social media companies pay dividends? Read more here.

A Mixed Bag

It’s understandable why investors love IPOs. In an IPO, a private business decides to take on outside investors. Company founders either offer some of their own stake for sale, or the firm will issue new shares to raise money. Subsequently, those shares will be listed on the major exchanges and will be able to be traded by the general public.

By providing this capital, investors have the ability to get in at the beginning of a company’s life span for the most part. Imagine if you were an early investor in Wal-Mart (WMT ) or Coca-Cola (KO ). Think about how rich you’d be.

There’s plenty of pageantries when it comes to IPOs. And in watching the company founders bang the opening gavel at the NYSE and pundits interviewing them from the trading floor, we get caught up. We’ve all been preconditioned with IPO fever. The financial media doesn’t help when all they report on are the successes. But for every Facebook (FB), there’s a Zynga Inc. (ZNGA).

And in fact, there are more ZNGAs than successes.

Data from Fidelity shows just how spotty the IPO market really is. Initial public offering activity over the last five years has continued to drop, and at the same time returns for those IPOs have been pretty poor as well. In 2011, the average after-market return for all the IPOs launched that year was negative 17.50%. Those average after-market returns were also negative in 2015 and 2016. Even the positive gains weren’t that jaw-droppingly awesome. Try a meager 5% to 7% for 2012 through 2014. That is no better than the market’s average.

You can find an updated list of companies that recently announced changes in their payout policies, along with their ex-dividend dates, in our Dividend Payout Changes and Announcements tool.

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