Realty Income (O -0.73%) is a terrific dividend stock. The real estate investment trust (REIT) has increased its dividend for 107 consecutive quarters. Its monthly payout currently yields nearly 6%, which is several times above the S&P 500's 1.3% dividend yield.

The REIT's magnificent dividend should continue its steady rise. One factor driving that view is its growing optimism for securing new investments this year. The REIT recently added $1 billion to its acquisition target, giving it the confidence to boost the low end of its growth rate.

Setting a very low bar

Realty Income initially expected to make about $2 billion in property investments this year. That's much lower than its investment volume in recent years (around $9 billion annually).

Several factors drove it to be very conservative with its investment volume target. Due to challenging market conditions, the REIT wanted to keep investment spending to what it could fund without outside financing. Thanks to its low dividend payout ratio, it generates over $800 million of annual free cash flow after paying dividends. In addition, it has a very strong balance sheet.

Realty Income also closed its $9.3 billion merger with Spirit Realty earlier this year. It expects the deal alone to add more than 2.5% to its adjusted funds from operations (FFO) per share this year.

Add in rent growth (which contributes about 1% to its bottom line each year), and the REIT had enough embedded drivers to grow its adjusted FFO per share by 3.3% to 5.3% this year without needing outside capital to fund additional acquisitions.

Gaining confidence

While Realty Income initially provided a very conservative acquisition outlook for 2024, it has grown more confident in its ability to secure new investments and outside capital as the year has worn on. It recently updated its guidance, boosting its acquisition volume target by $1 billion. It also nudged the low end of its adjusted FFO per share target range. It now expects to acquire $3 billion of real estate this year while generating $4.15-$4.21 per share of adjusted FFO.

A couple of factors are driving Realty Income's optimism. CEO Sumit Roy stated in the press release in which it unveiled its updated guidance: "These increases stem from an improving investment environment, particularly in Europe. Additionally, we continue to see stable operating performance in our high-quality, diversified global real estate portfolio."

Europe has been a notable growth driver for the company in recent quarters. Roughly 54% of the company's investment volume was in Europe during the first quarter. It has focused on Europe due to the strong initial cash yields it's seeing for new investments (8.2% in the first quarter compared to 7.1% in the U.S.). Europe was also a meaningful growth driver in the fourth quarter, during which Realty Income completed a large sale-leaseback transaction with a leading sporting goods retailer. That deal enabled it to enter several additional European countries.

The higher investment yields in Europe allow the REIT to tap outside funding sources to close accretive deals. If investment yields remain high and capital is available at attractive rates, Realty Income could further ramp up its investment volume. In the past, it routinely boosted its acquisition guidance as it grew more confident in its ability to secure accretive investments and attractive funding.

The REIT currently estimates that for every $1 billion of investments it makes at an 8% yield, it can deliver 0.5% of incremental adjusted FFO per share growth (assuming it's secured outside debt and equity capital at a blended rate of around 6.5%). Meanwhile, as interest rates fall (which many expect will happen in the coming months), its weighted average cost of capital should decline. That would enable it to make accretive deals with lower initial investment yields.

The dividend should keep rising

Realty Income has done a magnificent job growing its dividend over the years, and that should continue in the future. While it has already secured a solid growth rate this year, it's increasingly optimistic it can grow even faster. Meanwhile, with interest rates likely to begin their descent soon, it could further ramp up its acquisition volume in the future. That increasingly visible growth makes Realty Income an excellent option for those seeking a high-yielding and steadily rising stream of monthly dividend income.