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Q. What are REITs? I know they have to do with real estate, but can you tell me more? -- S. F., Salinas, Calif.

A. REITs are Real Estate Investment Trusts, organizations that combine the capital of many investors to acquire or finance all kinds of real estate, such as offices, hotels, or apartments. A REIT is a little like a mutual fund. Its portfolio is professionally managed and diversified, holding many properties. REITs typically trade on major stock exchanges.

REITs are unique in many ways. For starters, corporations or trusts that qualify as REITs generally don't pay corporate income tax and are often exempt from state income tax as well. They're required to invest at least 75 percent of their assets in real estate and pay out 95 percent of their income as dividends. In good years, REIT dividends can run quite high, topping 10 percent.

The popularity of REITs has increased in recent years, as people discover this way to invest in real estate without actually buying any.

Q. Should I avoid companies with low profit margins, or are some of them okay? -- C. R., Montgomery, Ala.

A. In general, higher margins are better than low margins.

But a glance at inventory turnover can reveal some exceptions. (Inventory turnover is represented by the cost of goods sold divided by the average dollar value of inventory.) Imagine two companies: the Acme Piano Co. (Ticker: GRAND) has a whopping profit margin of 28 percent, while the Krazy Kazoo Co. (Ticker: BZZZ) has only a 2 percent margin. If Acme only sells three pianos a year while Krazy sells out of kazoos each week, Krazy may well be the better buy, generating more cash in total than Acme.

Discount stores and supermarkets typically have low margins, but if they turn over inventory fast enough, they might still be decent investments.

Q. What do people mean when they refer to a stock's "multiple"? -- F. I., Tampa, Fla.

A. Multiples are an important concept to understand because they help you evaluate whether a stock might be undervalued or overvalued. In general, multiples simply compare a stock's current price to something, dividing the price by earnings (via a P/E ratio), revenues (via a price-to-sales ratio), or something else. Imagine a company trading at $36 per share. It's expected to earn $3 per share this year, so its P/E on this year's earnings is 12 (36 divided by 3 equals 12). You might refer to it as trading at an earnings multiple of 12.

If you read analyses of various companies, you'll see references to price-to-sales multiples, book-value multiples, cash-flow multiples, and more. It's instructive to compare a company's various multiples with those of its competitors, to see how each is priced relative to its peers.

Q. What does "ex-dividend" mean? -- Neil Snider, Los Angeles

A. A company's dividend is not simply paid to whoever is holding the stock on the day the dividend is paid. Instead, an "ex-dividend" date is set, often several weeks before payday. If you buy shares of a dividend-paying stock on or after the ex-dividend date, you won't receive the upcoming dividend payment. The person who owned the stock when it went ex-dividend gets that chunk of change. Stocks trading ex-dividend often have an "x" next to their listing in newspapers.

You might think it would be a neat trick to buy such stocks just before they go ex-dividend, so that you can quickly profit from the dividend amount. But stock prices get adjusted downward on the ex-dividend date, to compensate for the upcoming dividend payout. As Snidely Whiplash would mutter, "Curses! Foiled again!"

Q. What's a zero coupon bond? -- O. F., Paradise, Calif.

A. Bonds are loans. Imagine a regular 5 percent $10,000 bond, where you lend $10,000 to a company or government. You receive interest payments of 5 percent per year until the bond matures, when you get your $10,000 back. (You used to have to send in coupons to get these payments.) With a zero coupon bond, there are no interest payments, but the amount you lend is smaller than the amount you'll receive at maturity. Thus, a zero coupon bond could pay you the equivalent of 5 percent per year by having you pay $6,139 today in order to receive $10,000 in 10 years.

Q. What do you think of viaticals as investments? -- Jackie Jones, Gillette, Wy.

A. Viatical settlements have grown in popularity in recent years. But they're not without risk and they may make some people uncomfortable.

Viatical settlements are when a terminally ill person sells his or her life insurance policy to someone else. Imagine John, stricken with a fatal form of cancer. He's 36 and is expected to live only three more years. If he needs cash to pay for medical bills or just to spend and enjoy, he might sell his life insurance policy to Jane. If it's set to pay $100,000 on his death, Jane might pay $66,000 for it. That way he gets a lot of cash now and Jane expects to get the $100,000 in about three years. At that rate, she'd be earning roughly a 15 percent annual return.

There are many risks, though. John may hang on for seven years, significantly reducing Jane's return. Indeed, a cure for his cancer might be discovered. John may even outlive Jane! It's true that these settlements can provide a service for sick people, but they're not necessarily win-win. The middlemen arranging these settlements take cuts. Also, if John lives, he's without his life insurance policy and few insurers will want to insure him, as he's been so sick recently.

We're uneasy about investing in something that has us rooting for speedy deaths and against medical breakthroughs. Also, there appears to have been many instances of fraud with viaticals. For more info online, visit http://www.viatical-expert.net.

Next:- My Dumbest/Smartest Investment

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