Realty Income Looks Like It Trades at 52 Times Earnings. On the Measure REITs Are Actually Judged by, It's About 15.

Pull up Realty Income (NYSE: O) on a quote page, and one number jumps out. The real estate investment trust (REIT) trades at about 52 times earnings, a multiple normally reserved for fast-growing tech companies. For a dividend stock that yields about 5.1% and grows a few percent a year, that looks absurd.

The valuation metric is accurate. It's also, I'd argue, close to useless for investors who don't look beneath the surface. Measured against the cash flow the business actually generates, the same stock, at around $64 as of this writing, costs about 15 times.

So which number should a dividend investor trust?

Image source: Getty Images.

Why the earnings number looks so small

Realty Income owns more than 15,500 commercial properties on long-term net leases. At the end of 2025, those buildings were leased to about 1,760 clients across 92 industries, on leases averaging nearly nine years of remaining term.

The tenants generally cover the taxes, insurance, and maintenance (that's the net in net lease), which keeps the rent checks predictable.

Accounting rules require the company to depreciate every building, booking a slice of each building's cost as an expense, year after year, the way any company spreads its capital expenditures across the years the equipment gets used. That logic works for delivery trucks, which really do wear out. But it fits a well-kept building with a long-term tenant far less comfortably.

After all, the charge has nothing to do with how much cash the property brings in.

The depreciation is non-cash, but it shrinks reported earnings all the same. In the first quarter of 2026, Realty Income reported net income of $0.33 per share -- and adjusted funds from operations (AFFO) of $1.13 per share, up 6.6% year over year from $1.06. That's roughly the gap in a typical quarter. AFFO starts with net income, adds the depreciation back, and strips out one-time and non-cash items. In other words, it approximates the cash the business actually earned.

It's also the measure Realty Income itself guides on. Against the $4.28 of AFFO per share the company generated in 2025, up from $4.19 in 2024, the current share price is about 15 times.

Even at the stock's 52-week high of $67.94, that multiple never got much past 16. At the low, it dipped near 13.

What the better number says about the price

In May, management raised its 2026 AFFO guidance to between $4.41 and $4.44 per share, implying 3% to 3.7% growth, and lifted its full-year investment guidance to $9.5 billion from $8 billion. So the trajectory is slow but accelerating a little. AFFO grew about 2% last year, and guidance calls for 3%-plus this year as the company puts more money to work.

The dividend (about $3.25 a share annually, paid in monthly installments) consumes about 73% of this year's expected AFFO. And that leaves room for error, plus room for the monthly payout to keep inching higher.

Paying about 15 times for cash flow growing 3% is arguably a fair price, not an obviously cheap one. But zoom out. Add the 5.1% starting yield to that growth, and the total works out to roughly 8% a year -- if the valuation multiple simply stays put.

However, the yield is above 5% for a reason. Realty Income borrows heavily to buy buildings, so higher interest rates squeeze the spread between its borrowing costs and the yields on new purchases. And a tenant bankruptcy could turn a well-covered lease into a vacancy.

With that said, the portfolio's breadth softens that second risk, but it can't erase it.

Realty Income reports its second quarter on Wednesday, Aug. 5, after the market closes. I'll be watching two figures: the AFFO guidance range and the pace of property purchases. The guidance range is the growth half of the case, and the purchase pace shows what management thinks of the deal market at today's borrowing costs.

As for the 52 times earnings, I'd look beyond it. It's an artifact of depreciation rules, not a sign the stock is expensive. On the measure that tracks the cash, shares cost about 15 times and pay 5.1% a year, monthly, while modest growth compounds underneath. For income investors, I think that's a fair deal, and Wednesday's guidance is the number that could change my mind. For now, I like the stock here.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.