Investors are right to be leery of stocks with high dividend yields. Although such returns appear attractive on the surface, investors have to remember that dividend stocks that are not real estate investment trusts (REITs) can adjust dividend payments at any time. Moreover, REITs have the same freedom as long as they pay out at least 90% of their net income in dividends.
This fact may leave investors wondering what to do about a REIT called Realty Income (NYSE: O), a popular stock on the Robinhood Markets platform. Known for paying a monthly dividend, its 5% dividend yield is more than quadruple the S&P 500 average of 1.2%. Does that high return make the payout too good to be true? Let’s take a closer look.
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Realty Income owns more than 15,500 single-tenant, net-leased properties. Under the terms of these contracts, the tenant pays for insurance, property taxes, and maintenance, ensuring a steady income for the landlord.
Furthermore, occupancy is just under 99%, meaning the company is always looking to acquire or develop additional properties. Also, since its tenant list includes companies like Home Depot, Dollar General, and Tractor Supply, it boasts a steady client base.
That property portfolio funds a $3.24 per share annual dividend, and its monthly payout has risen at least once per year since its inception in 1994. That streak sets an expectation of periodic dividend hikes, and it could undermine confidence in the stock if its payout did not rise at least one time per year.
For that reason, Realty Income is unlikely to slash its dividend unless it cannot afford to sustain it. Fortunately, dividend affordability does not appear to be an issue for this company.
In the third quarter of 2025, it earned $4.20 per share in funds from operations income, a measure of a REIT’s free cash flow. That cash allows Realty Income to cover the $3.24 per share in dividends and leaves some cash available for other purposes.
Investors should also note that lower stock prices boost dividend yields. Hence, the fact that Realty Income stock trades at a discount of over 20% from the all-time high has contributed to the higher dividend returns.
Moreover, the Fed has cut interest rates in recent months. That should lower credit costs, making more real estate deals profitable. Thus, as profits rise, the stock should also increase, possibly making Realty Income one of the smartest dividend stocks to buy.
