W. P. Carey (WPC -1.70%) has an incredible track record of paying dividends. The real estate investment trust (REIT) has increased its payout every year since its public market listing in 1998, raising it in most quarters. It currently offers a 6.6% dividend yield, significantly above the market's average (the S&P 500's dividend yield is around 1.6%).

I want more of that steadily rising income stream in my portfolio, which drove me to buy another $1,100 in shares. Here's why I'm confident that the diversified REIT can continue increasing its attractive dividend.

Build on a firm foundation

W. P. Carey owns a diversified portfolio of operationally critical commercial real estate. It has 1,475 single-tenant properties across North America and Europe, net leased to nearly 400 tenants. These properties include warehouses (24% of its annual base rent), industrial buildings (29%), retail locations (17%), office buildings (16%), self-storage facilities (4%), and a variety of other properties (10%). In addition, W. P. owns and operates 85 self-storage locations.

This diversified portfolio supplies the REIT with steady rental income. Its net leases protect it from inflating costs because tenants cover building insurance, maintenance, and real estate taxes.

W. P. Carey pays out a reasonable amount of its stable cash flow in dividends. It expects its dividend payout ratio to be around 80% of its adjusted funds from operations (FFO) this year. That gives it a solid cushion while enabling the REIT to retain cash to help fund new investments. 

Finally, W. P. Carey has a strong, investment-grade balance sheet. The REIT has received two credit rating upgrades over the past year, as Moody's increased its bond rating to Baa1 (from Baa2) while S&P Global raised it to BBB+ (from BBB). The rating agencies highlighted the quality of the company's portfolio and the strength of its balance sheet.

The company's higher credit rating gives it greater access to lower-cost capital, a competitive advantage in the current market. Its balance sheet capacity and liquidity give it a lot of financial flexibility to make new investments. 

Dual growth drivers

W. P. Carey's existing leases offer built-in growth. Nearly all its leases feature some form of annual rental rate escalation clause. More than half tie rents to inflation (37% uncapped to the increase in CPI, and 17% have a CPI cap), while another 43% rise at a fixed annual rate.

High inflation in recent years is driving elevated rent growth. The company's same-store annual base rent has risen 4.3% this year, a significant acceleration from around 1.5% in 2020 and 2021. The company expects this higher rate to continue due to the lag in when CPI escalation impacts rent. Meanwhile, recently signed leases with fixed rental increases are coming in at higher than historical levels.

The company's other growth driver is acquisitions. It completed $938.5 million of deals through the first half of the year. That has it on track to invest $1.8 billion to $2.3 billion on new properties in 2023.

Rising interest rates are increasing its acquisition opportunities because it's making sale-leaseback transactions a more attractive form of financing. Meanwhile, fewer buyers are competing for these opportunities. 

W. P. Carey has a lot of financial flexibility to fund new investments thanks to its post-dividend excess cash and balance sheet flexibility. In addition, the company expects to generate over $2 billion in cash from capital recycling opportunities in the next couple of years. U-Haul has already exercised its option to reacquire a portfolio of self-storage properties that will generate $465 million in cash when the portfolio sale closes next year.

In addition, the company is exploring its options for its operating self-storage properties and plans to eventually monetize its investment in cold-storage operator Lineage Logistics. On top of those opportunities, W. P. Carey plans to continue shrinking its office portfolio. Future sales of office properties would provide the REIT with additional capital to redeploy into new investments. Capital recycling enables the company to enhance its portfolio while maintaining a strong balance sheet. 

An excellent income investment

W. P. Carey has a distinguished track record of paying dividends, which should continue. The diversified REIT has a strong business model and financial profile, putting its high-yielding payout on a firm foundation. Meanwhile, it has embedded rent growth and ample financial flexibility to fund new investments, which should grow its cash flow, enabling the REIT to continue increasing its dividend.

That steadily rising payout is why I can't seem to get enough of W. P. Carey in my portfolio these days.