Realty Income (O) vs. NNN REIT (NNN): Why Dividend Investors Should Prioritize Quality Over Yield

For income-focused investors, the allure of high yields can often overshadow the critical importance of long-term sustainability. In the case of Realty Income (O) and NNN REIT (NNN), both real estate investment trusts (REITs) offer compelling dividend yields of approximately 5.5–5.9% as of 2025. However, a deeper analysis of their financial metrics, portfolio quality, and total return potential reveals that prioritizing quality-such as diversified tenant bases, conservative payout ratios, and disciplined capital allocation-can yield superior long-term outcomes.

Dividend Sustainability: Payout Ratios and AFFO Growth

Dividend sustainability hinges on a REIT's ability to cover payouts with consistent cash flow. Realty Income's 2025 dividend payout ratio stands at 75.1% of adjusted funds from operations (AFFO), while NNN REIT's ratio is slightly lower at 69%. At first glance, NNN's lower ratio suggests greater flexibility to raise dividends or reinvest in growth. However, Realty Income's AFFO growth trajectory is more robust, with a mid-point projection of 4.8% for 2025. This growth is underpinned by its disciplined acquisition strategy, including $1.2 billion in investments during Q2 2025 at a 7.2% cash yield, 76% of which were deployed in Europe.

NNN REIT, meanwhile, reported a 2.4% year-over-year AFFO per share increase in Q3 2025 and updated its full-year guidance to $3.41–$3.45 per share. While its growth is solid, its reliance on U.S.-based retail properties-concentrated in convenience stores and automotive services-introduces sector-specific risks that could constrain AFFO expansion during economic downturns.

Portfolio Quality: Diversification and Tenant Strength

Realty Income's portfolio of 15,606 properties spans 91 industries, including retail, industrial, and gaming, with top tenants like Walmart, Home Depot, and FedEx according to its latest press release. This diversification, coupled with a 98.7% occupancy rate and lease renewals at 3.5% higher rental rates, underscores its resilience. In contrast, NNN REIT's 3,700-property portfolio is heavily weighted toward retail, with 7-Eleven, Mister Car Wash, and Dave & Buster's as key tenants according to Fool's analysis. While these tenants are growing, their smaller size and sector concentration make NNN's portfolio more vulnerable to retail sector headwinds.

Realty Income's global reach and industrial exposure also position it to capitalize on long-term trends like e-commerce-driven logistics demand. NNN's focus on U.S. retail, though profitable, lacks the same breadth of opportunity.

Total Return Potential: Balancing Income and Growth

Both REITs have delivered strong historical returns. Over 30 years, Realty Income has generated a total return of 4,960% with reinvested dividends, outperforming the S&P 500's 2,030%. NNN REIT, meanwhile, has averaged 11.1% annual returns over the same period according to its investor relations page. Looking ahead, one analysis forecasts a 46% total return by 2026 and 13% annual returns through 2030. These figures, however, rely on continued strength in its retail-focused acquisitions and disciplined capital allocation.

Realty Income's slower but steadier growth-supported by its 131st consecutive dividend increase and a 4.8% AFFO growth outlook-appeals to investors prioritizing stability. Its global diversification and high-quality tenant base also reduce the risk of earnings volatility, which is critical for sustaining long-term returns.

Conclusion: Quality Trumps Yield in the Long Run

While both REITs offer attractive yields, dividend investors should prioritize quality metrics like payout ratios, portfolio diversification, and tenant creditworthiness. NNN REIT's lower payout ratio and aggressive growth projections make it a compelling option for those seeking higher capital appreciation. However, Realty Income's diversified portfolio, global scale, and consistent AFFO growth provide a stronger foundation for long-term sustainability. In an environment where economic uncertainty and sector-specific risks persist, the latter's emphasis on quality ensures dividends remain secure-and returns remain resilient-for decades to come.