Realty Income Raised Its 2026 AFFO Guidance. Here's What That Means for Its 5.2% Dividend.

Known as The Monthly Dividend Company, Realty Income (NYSE:O) continues to demonstrate why it is a great stock for generating passive income.

The company recently reported solid second-quarter earnings, with total revenue of nearly $1.55 billion coming in ahead of Wall Street consensus estimates.

Earnings were in line with estimates, while Realty Income also raised its full-year adjusted funds from operations (AFFO) guidance.

AFFO is essentially the free cash flow of a real estate investment trust (REIT), a corporation that can avoid federal income tax if it meets certain conditions.

Management is now guiding for 2026 AFFO per share of $4.44-$4.45, up from the company’s prior guide of $4.41-$4.44 and ahead of consensus estimates calling for $4.37.

Here’s what this means for Realty Income’s roughly 5.2% trailing dividend.

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The business continues to look strong

Realty Income is a triple net lease operator, meaning it leases properties to tenants, who are then responsible for property taxes, insurance, and maintenance. In return, tenants have more control over their properties and may be able to negotiate longer-term leases at better rates.

Realty Income specifically focuses on retaining long-duration leases with tenants that generate strong cash flow. Its largest exposure by sector is grocery stores (11.1%) and convenience stores (9.4%).

Realty Income has recently capitalized on artificial intelligence by forming a joint venture with Cloud Capital and an unnamed institutional investor to invest in a diversified portfolio of “hyperscale assets leased to investment-grade tenants under long-duration, triple-net leases.”

Realty Income expects to invest $1.4 billion in the venture, which will begin with three data centers in Northern Virginia, with opportunities to make additional investments down the road.

At the end of the second quarter, data centers still made up a relatively small part of Realty Income’s portfolio at no more than 2.4%, according to earnings materials.

Other parts of the quarter also looked good. Portfolio occupancy held fairly steady at 98.8%, although management has guided for roughly 98.5% for the full year.

The company also guided for an uptick in investments to $10 billion for the year, up half a billion from prior guidance.

Rising AFFO should lead to a better dividend over time

To arrive at FFO, Realty Income reconciles net income by adjusting for items such as depreciation and amortization, a common reconciliation used to derive free cash flow.

However, it also makes adjustments for unique and prevalent items, specifically in the real estate business, such as impairments and gains on the sale of real estate.

Then there are even more adjustments made to arrive at AFFO, such as adjustments for rent and expenses, and the amortization of leases that are below- or above-market.

AFFO is a good measure of Realty Income’s ability to pay and raise its monthly dividend. In the first six months of the year, Realty Income paid out $1.6215 in dividends per common share. AFFO per diluted share was $2.22, meaning the company is paying out 73% of AFFO.

That’s a solid buffer for the company already. With AFFO guidance for the year slightly up from prior guidance, that should translate into slightly faster dividend growth over time.

REITs are required to distribute 90% of their taxable income to shareholders, so if you see AFFO growing, there is a good chance that Realty Income’s dividend will follow suit.

However, this is nothing new, as Realty Income has grown its annual dividend at a 4.1% compound annual growth rate since 1994.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.