Realty Income in a Fed Easing Cycle: Buy, Hold or Sell?

The Federal Reserve's ongoing rate-cutting trajectory has positioned real estate investment trusts (REITs) like Realty Income (O) at a crossroads. With policymakers prioritizing risk management amid a cooling labor market and moderating inflation, the Fed's easing cycle is expected to continue into 2026, potentially reshaping the valuation and dividend dynamics for income-focused investors. For Realty Income, a REIT synonymous with consistent monthly dividends and a diversified tenant base, the interplay between macroeconomic tailwinds and its own financial metrics demands a nuanced evaluation.

The Fed's Easing Cycle: A Tailwind for REITs

The Federal Reserve's recent actions underscore a clear pivot toward accommodative monetary policy. At its November 2025 meetings, the central bank cut the federal funds rate by 25 basis points, bringing the target range to 3.75%–4.00% after two prior reductions in 2025. These cuts, described as "risk management" measures, reflect concerns over a rising unemployment rate (4.4% as of early November 2025) and slowing wage growth. Market expectations, as captured by Fed funds futures, now imply an 84% probability of a 25-basis-point cut at the December 2025 meeting, with institutions like UBS and J.P. Morgan projecting two additional rate cuts through early 2026.

For REITs, lower interest rates typically reduce borrowing costs and enhance property valuations, particularly for long-leased, triple-net (NNN) REITs like Realty Income. These REITs derive income from stable, creditworthy tenants under long-term leases, making them less sensitive to short-term rate fluctuations than more cyclical real estate segments. However, the sustainability of their dividend payouts in a low-rate environment hinges on their financial health and operational efficiency.

Dividend Sustainability: A Mixed Picture

Realty Income's dividend coverage ratio, a critical metric for income investors, stood at 74.7% for the three months ended September 30, 2025. This means the company's annualized dividend of $3.234 per share represented 74.7% of its diluted adjusted funds from operations per share of $1.08 during the quarter. While this ratio is below the 100% threshold often preferred by conservative investors, it remains within a range historically accepted for high-yield REITs, particularly those with strong tenant credit quality and long lease durations.

The company's debt profile further supports dividend sustainability. As of Q4 2025, Realty Income reported a net debt to annualized pro forma adjusted EBITDAre ratio of 5.5x, a level that, while elevated, is manageable given its investment-grade credit ratings and stable cash flows. Additionally, the REIT's updated 2025 AFFO guidance of $4.25–$4.27 per share, based on strong third-quarter performance ($1.08 per share), provides a buffer for maintaining its dividend.

However, Realty Income's downward revision of its 2025 net income per share guidance-from $1.29–$1.33 to $1.27–$1.29-signals some near-term headwinds. These challenges, coupled with a modest 2.3% increase in the monthly dividend to $0.2695 per share, suggest a cautious approach to payout growth. For investors prioritizing dividend security, this balance of coverage and prudence may be acceptable, but it leaves little room for error in a volatile market.

Valuation Appeal: Reasonable but Not Compelling

Realty Income's valuation metrics as of November 2025 suggest a stock trading at a moderate discount relative to its historical averages. The company's price-to-FFO (P/FFO) ratio stands at approximately 14.33, while its price-to-AFFO (P/AFFO) ratio is 14.19 as of November 2025. These multiples are in line with the broader REIT sector but fall short of the undervalued territory that often drives outsize returns. The forward P/AFFO ratio, estimated at 13.2 based on midpoint 2025 guidance, further reinforces this assessment.

Analysts have tempered their expectations for the stock, with a consensus "Hold" rating and an average price target of $61.85, implying an 8.28% potential upside from its current price according to market analysis. This cautious outlook reflects both the REIT's structural strengths-such as its 18,000+ tenant base and 98.6% occupancy rate-and macroeconomic uncertainties, including the pace of Fed rate cuts and potential disruptions in the commercial real estate sector.

Strategic Considerations for Investors

The decision to buy, hold, or sell Realty Income hinges on three key factors:
1. Fed Policy Trajectory: If the Fed delivers on its projected two additional rate cuts in early 2026, REITs like Realty Income could see improved financing conditions and higher property valuations. However, a slower-than-expected easing cycle or a sudden spike in inflation could pressure yields and compress REIT multiples.
2. Dividend Resilience: While Realty Income's 74.7% dividend coverage ratio is acceptable, investors should monitor its ability to maintain this level amid rising interest rates or economic downturns. A further decline in net income or a deterioration in tenant credit quality could force a dividend cut.
3. Valuation Dynamics: At current levels, Realty Income offers a compelling yield (approximately 5.3%) but lacks the margin of safety seen in more attractively priced REITs. For income-focused investors, this may justify a "Hold" stance until valuation or macroeconomic conditions improve.

Conclusion: A Prudent "Hold" in a Volatile Environment

Realty Income remains a cornerstone of the dividend growth universe, with a track record of consistent payouts and a business model well-suited to a Fed easing cycle. However, its moderate valuation, slightly reduced earnings guidance, and sub-100% dividend coverage ratio temper its appeal in a market where volatility remains a constant. For investors seeking defensive income, a "Hold" recommendation is warranted, with a focus on monitoring the Fed's policy path and the REIT's ability to navigate near-term challenges.

As the Fed continues its easing cycle, Realty Income's long-term fundamentals-diversified tenants, long-leased properties, and a disciplined capital structure-position it to outperform in a low-rate environment. Yet, in the short term, the stock's valuation and operational dynamics suggest patience is the prudent course.