Understanding the role of Adjusted Funds from Operations (AFFO) and Net Operating Income (NOI)
AFFO and NOI are data points that can be used for assessing the sustainability of dividends in income-generating investments. These metrics provide a clearer picture of a company’s financial health, particularly in sectors like real estate and business development, where consistent cash flow is key to maintaining and growing dividend payouts.
It’s important to take into account AFFO as a refined measure of a company’s ability to generate cash flow after accounting for recurring capital expenditures and other necessary adjustments. Unlike traditional metrics like net income, AFFO provides a more accurate reflection of the cash available for distribution to shareholders. This makes it a critical tool in evaluating whether a company can sustain its current dividend levels or has the capacity to increase them over time.
Similarly, NOI is a vital indicator of a company’s operational efficiency, particularly in real estate investments. NOI reflects the income generated from property operations after deducting operating expenses but before interest, taxes, and depreciation. By focusing on NOI, investors can gauge the core profitability of a company’s assets, ensuring that the dividends they receive are backed by strong, consistent earnings. At Fly High Investing, we advise our clients to look beyond just the dividend yield and consider these underlying metrics to make informed decisions that align with their long-term financial goals.