When evaluating income investments, dividend yield and dividend growth tend to get most of the attention. But equally important, if not more so, is dividend sustainability. In other words: is the company likely to keep paying, or is there risk of a cut or suspension?
The go-to metric for gauging that risk is the payout ratio, typically calculated as dividends per share divided by earnings per share (EPS). A high payout ratio may signal trouble if a company is returning more to shareholders than it’s earning.
But this formula falls short when applied to real estate investment trusts (REITs). For example, investors who look up Realty Income (O) on public platforms like Yahoo Finance might see payout ratios north of 100%. That looks alarming, but it’s not necessarily a red flag.
The issue lies in the structure of REITs and how their earnings are reported. Many data providers don’t adjust for the differences, which can distort the true picture of dividend coverage. Here's how to properly assess the sustainability of a REIT’s payouts using the right metrics.
Why AFFO, Not EPS, Is the Right Lens for REITs
REITs don’t operate like traditional companies, and they don’t report or rely on EPS the same way either. Instead, the key metric used to evaluate a REIT’s true earnings power is adjusted funds from operations (AFFO).
AFFO is a non-GAAP figure that varies slightly by REIT, but it generally starts with funds from operations (FFO), which adds depreciation and amortization back to net income, and then subtracts recurring capital expenditures and straight-lining of rents.
In simpler terms, it reflects the actual cash a REIT has available to pay dividends, after accounting for the maintenance and upkeep needed to keep properties generating income.
Industry experts consider AFFO a more accurate measure of a REIT’s ability to sustain its dividend because it better captures the recurring, cash-based nature of their business.
Unlike EPS, which includes non-cash items like property depreciation and gains or losses on asset sales, AFFO focuses on what really matters: reliable, repeatable cash flow.
Revisiting Realty Income's Payout Ratio
According to Yahoo Finance, Realty Income shows a payout ratio of 287%. That figure is clearly misleading. It suggests the company is paying out more than twice what it earns, which would raise serious questions about dividend sustainability.
But that number is based on EPS, which, as mentioned earlier, is not the right benchmark for REITs. When you look at AFFO, you get a much clearer picture.
In its most recent quarterly earnings for the three months ended March 31, 2025, Realty Income reported AFFO per share of $1.06. During that same period, the company paid $0.796 in monthly dividends per share. That equates to a payout ratio of 75.1% of AFFO.
This number is far more reasonable and paints a realistic picture of dividend sustainability. A payout ratio in the 70–80% range is typical for well-run REITs and leaves room for reinvestment and operational flexibility.
It’s also worth noting that this marks Realty Income’s 10th consecutive quarterly dividend increase, and its 130th increase since listing on the NYSE. That kind of track record doesn’t come from stretching to pay unsustainable distributions.
Look Beyond the Headline Numbers
The key takeaway for income investors is this: don’t take headline payout ratios at face value, especially when evaluating REITs.
Metrics like AFFO are better suited to assess dividend sustainability because they reflect the actual cash available to pay shareholders. Realty Income’s true payout ratio is closer to 75%, not 287%, once you use the right lens.
The same principle applies to other capital-intensive sectors like pipelines and utilities, where non-GAAP metrics such as distributable cash flow (DCF) often provide a more accurate view of how well dividends are covered.
Remember to always dig a little deeper to understand what’s really backing those monthly or quarterly payouts.
About Us
Jay D. Hatfield is CEO of Infrastructure Capital Advisors and is the lead portfolio manager of the Infrastructure Capital Bond Income ETF (NYSE: BNDS), InfraCap Small Cap Income ETF (NYSE: SCAP), InfraCap Equity Income Fund ETF (NYSE: ICAP), InfraCap MLP ETF (NYSE: AMZA), Virtus InfraCap U.S. Preferred Stock ETF (NYSE: PFFA), InfraCap REIT Preferred ETF (NYSE: PFFR) and private funds. Each month Infrastructure Capital hosts a monthly economic webinar; you can sign up to attend by visiting our website www.infracapfunds.com (important disclosures can also be found on the website). For a prospectus please reach out to us or visit the links above for each respective fund.
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