To invest in real estate, consider an REIT

Investing in real estate is tricky, as it typically requires a lot of money to buy properties, and it can be hard to unload them quickly if you need to. You might consider real estate investment trusts instead. An REIT is a company that buys lots of properties and rents them out; it also trades like a stock, so shareholders can profit as the company grows in value and pays dividends. A good REIT to consider is Realty Income (NYSE: O), which focuses primarily on the retail sector.

Realty Income specializes in single-tenant commercial properties rented out under long-term leases. It recently owned or held interests in 13,118 properties, which were leased to 1,303 clients in multiple industries. It also boasts a 99% occupancy rate, so it’s been able to generate steady, consistent income.

Realty Income’s dividend is a key attraction, recently yielding 5.2%. It has been increased for 25 consecutive years, and it’s paid on a monthly basis instead of the more conventional quarterly one.

Realty Income’s diversity of commercial properties means that the company is less volatile than more specialized REITs, because if one industry is doing poorly, chances are that another one in the company’s portfolio will be doing well.

Realty Income also has an excellent balance sheet, rated A- (investment grade) by S&P Global Ratings. Income-seeking long-term investors should give it a closer look. (The Motley Fool has recommended Realty Income.)

Ask the Fool

From B.T., Salem, Ore.: Are there any tax breaks for military folks?

The Fool responds: There sure are. For example, any combat pay earned might not count as taxable income — though you can count it when calculating your Earned Income Tax Credit, which can shrink your tax bill. Enlisted members, warrant officers or commissioned warrant officers can often exclude other items from taxation; these may include accrued leave pay and repayments on student loans.

Moreover, those in the military either live on base or use a housing allowance that isn’t taxable. Those receiving a monthly “basic allowance for subsistence” (covering meals) get to use it tax-free. Military reserve members may qualify to take early, penalty-free withdrawals from IRA and 401(k) accounts. And those serving in combat zones get an automatic 180-day extension for filing their tax returns, paying their taxes and filing refund claims.

This isn’t formal tax advice, so consult a tax professional for guidance on your personal situation. Learn more in IRS Publication 3 (the Armed Forces’ Tax Guide) at IRS.gov.

From R.G., Five Forks, S.C.: What does it mean when a company might be “taken private”?

The Fool responds: When companies first sell shares of themselves to the public, they typically do so via an initial public offering (IPO). Once public, they’re subject to many regulatory requirements, such as filing regular earnings reports.

But they can revert to being not public, with their shares no longer trading on the public market. That can happen in a variety of ways, including a merger with a private company, or having all the shares bought by a private equity firm; that’s being “taken private.” Companies that have been taken private include the company formerly known as Twitter (now X) and Panera.

The Fool’s School

It’s always best to invest in a stock when it’s undervalued. That’s easier said than done, though, because there’s no way to find a definitive, universally recognized intrinsic value of a stock. Instead, analysts use a range of tools, some simple and some very complicated, to arrive at estimates — and analyst estimates often disagree.

One easy-to-use metric for individual investors is the price-to-earnings (P/E) ratio. To calculate a P/E ratio, you simply divide a company’s stock price by its trailing 12 months’ worth of earnings per share (EPS).

For example, home improvement specialist Lowe’s EPS was recently $10.44, and its recent stock price was around $221. Divide $221 by $10.44, and you’ll arrive at a P/E of about 21. (You could also calculate a “forward P/E” by using next year’s expected EPS, but standard P/E ratios use trailing EPS.)

A P/E ratio of 21 means that at the current stock price, you’re paying $21 per dollar of company earnings. In general, the lower the P/E, the better. Different industries tend to have different typical ranges of P/E ratios, though: Capital-intensive industries such as automakers will generally have low P/Es, while more capital-light businesses such as software specialists tend to have higher ones. So don’t compare apples to oranges: A carmaker with a P/E of 15 may be overvalued, while 15 can be an attractive P/E for a software company.

Ideally, compare a company’s P/E ratio with those of its peers and with its own P/E over the past few years. The P/E ratio should never be the only measure you assess when making an investing decision, but it can give you a rough idea of a stock’s valuation.

You can learn more about how to value a stock in the “Investing Basics” nook at Fool.com; you can also look up companies and their financial measures there.

My Dumbest Investment

From R.C., online: I’ve made many regrettable investment moves. For example, when Facebook debuted as a stock via an initial public offering in 2012, I was extremely optimistic about it. Post-IPO, the price dropped, and I wasn’t dissuaded at all. I bought at a low price and soon after happily sold with a nice gain. But obviously, I made a huge mistake by not holding on to the stock. I don’t even want to do the math on what that investment would be worth by now.

Much more egregious than that, I made brutal rookie mistakes in my first few investing years, such as buying small-cap stocks I’d never heard of with questionable businesses, thinking that if their share price just went up $1, I’d make a killing. Ouch.

The Fool responds: Selling out of a great stock too soon is a very common blunder — made not only by rookies, but also by seasoned investors. Facebook (which now goes by the name Meta Platforms) recently had a market value below $730 billion, and that’s down considerably, as the company passed the trillion-dollar mark back in 2021. Facebook itself (not counting Meta’s other services) recently boasted more than 2 billion daily users. The good news is that if you’re now bullish about the company’s potential to grow further, you can still invest in it.

And regarding small, unproven businesses — yes, steer clear, unless you’ve researched them well.

Who am I?

I trace my roots back to 1923, when some bros founded me to sell textile remnants. I moved on to making pencil boxes and school supplies, and debuted my first toys in the 1940s. My history features iconic toys such as Mr. Potato Head and G.I. Joe; my brands today include Transformers, Play-Doh, Nerf, My Little Pony, Power Rangers and Magic: The Gathering. I acquired Milton Bradley in 1984, Tonka in 1991 and Wizards of the Coast in 1999. I’m based in Pawtucket, R.I., and my market value recently approached $9 billion. Who am I?

Can’t remember last week’s trivia question? Find it here.

Last week’s trivia answer: ADT