Realty Income Corp (O): A Dividend-Focused Investment in a Rising-Rate World

Jefferies' recent upgrade of Realty Income Corp (O) to a $65 price target-maintaining a "Buy" rating-has reignited debate about the REIT's appeal in a high-interest-rate environment. While skeptics highlight risks like elevated borrowing costs and a dividend payout ratio of 310.6% based on net income, according to FinanceCharts, a deeper dive into adjusted funds from operations (AFFO) and operational metrics reveals a more nuanced picture. For income-focused investors, Realty Income's 5.38% yield, per StockAnalysis, combined with its 661st consecutive monthly dividend as reported by StocksToday, remains compelling-if carefully evaluated.

Dividend Sustainability: AFFO as the Key Metric

Critics often cite Realty Income's high payout ratio, but this metric is misleading when based on net income rather than AFFO. As of Q2 2025, the company's dividend consumed just 76% of AFFO per share, according to a Realty Income press release, a level analysts consider sustainable. Jefferies' Linda Tsai has highlighted that viewpoint in commentary cited by a MarketScreener note. This buffer is critical in a rising-rate environment, where REITs face higher debt costs. Realty Income's debt-to-EBITDA ratio of 5.5x, per the StockAnalysis forecast, and 98.6% occupancy rate, according to The REIT Forum update, further underscore its resilience. The company's focus on non-cyclical tenants-such as Dollar General and Regal Cinemas-provides stable cash flows even as interest rates climb, as noted in a Monexa analysis.

Navigating Rising Rates: Strategic Leverage and Diversification

Realty Income's capital structure is a double-edged sword. While 95% of its debt is fixed-rate with an average maturity of 5.8 years, according to a Panabee report, rising rates could strain future refinancing. However, the company has proactively locked in favorable terms, including a $2.0 billion share repurchase program announced in a Realty Income press release and strategic investments in Europe, where capital costs remain lower based on a Monexa deep dive. Jefferies' upgraded price target also reflects confidence in these moves, noting that Realty Income's weighted average cost of capital is improving as the Fed pauses rate hikes in a MarketScreener note.

Growth Potential: Beyond the Dividend

Beyond dividend safety, Realty Income's growth story hinges on diversification. The 2024 merger with Spirit Realty has expanded its portfolio into industrial and data center assets, sectors less sensitive to retail headwinds. Q2 2025 results showed $1.2 billion in investments at a 7.2% cash yield, per company reporting, demonstrating disciplined capital allocation. While analysts warn of risks like tenant credit deterioration, the company's 4.2% compound annual dividend growth since 1994 is documented in a Motley Fool analysis, suggesting management can adapt.

Risks and Rewards in Balance

Investors must weigh Realty Income's strengths against macroeconomic headwinds. A 40% year-over-year spike in impairment provisions highlights exposure to weak tenants, while a 5.1% stock price decline in 2025, according to Markets research, reflects broader REIT sector volatility. Yet, with Jefferies and others projecting a 20% CAGR in pre-sales for net-lease REITs in some sector commentary (see a Moneycontrol article), and the Fed signaling potential rate cuts in 2025 amid broader market coverage by Finviz, the risk-reward profile appears favorable.

Historical data from 2022 to 2025 reveals a pattern of underperformance following earnings releases. Over 88 event-days, the stock's cumulative average return fell by –4.0% by day 30, with statistically significant underperformance emerging from day 8 onward (FinanceCharts). The share of positive reactions dropped from ~47% on day 1 to ~25% by day 30, reinforcing a negative drift. This trend suggests that while Realty Income's dividend resilience is robust, its stock price has historically lagged its benchmark in the medium term after earnings, a factor investors should weigh against its income appeal.

Conclusion: A Buy for Patient Income Investors

Jefferies' $65 price target implies a 19.4% upside from current levels, aligning with the broader analyst consensus of $61.67 as reported by StockAnalysis. For investors prioritizing income over growth, Realty Income's dividend track record, AFFO coverage, and strategic diversification justify the "Buy" rating-provided they accept the risks of a high-yield, high-rate environment. As Jefferies' Linda Tsai notes, "Realty Income's ability to balance disciplined capital deployment with tenant quality positions it to outperform in a stabilizing net-lease sector."