A common measure of dividend sustainability is the payout ratio, the percent of earnings that are paid out to shareholders. Unfortunately, earnings don’t always represent how much money is available to management because they include noncash items. That’s why free cash flow — what’s left of sales after the expense of running the business and buying and maintaining physical assets — can provide a more useful way to gauge how much a company could pay out and how likely a dividend cut might be. For high-yielders under threat, like Realty Income (NYSE: O), ExxonMobil (NYSE: XOM), and Gilead Sciences (NASDAQ: GILD), comparing free cash flow to the dividends helps us determine how easily the company can keep doling out the cash while working through obstacles.
Known as the monthly dividend company, Realty Income owns more than 6,000 properties, with the largest categories being convenience and dollar stores, drug stores, as well as gyms and theaters. The company offers triple-net leases, meaning the tenants pay the taxes, insurance, and maintenance on the property.