It means "to give," usually something important, sometimes an award or an honor. It is a very old-fashioned word. It is only used nowadays if someone wants to sound very important, dignified, or intentionally old-fashioned. Normal speech: "Thank you for giving me this award." Elevated speech: "Esteemed colleagues, please accept my sincere and appreciative gratitude for the high compliment you have paid me in bestowing this honor upon me."

The context you use is correct. Bestow is used, but not as much as it was. It is normally associated with something high, as you have already mentioned about God bestowing his mercy this is a good example. "The Queen is pleased to bestow upon him the honour of a knighthood" Thankyou for bestowing upon me the honour of answering your question.

It is not a word, a verb that is used much in common, everyday English. It is used formally in religion, often in prayer, as you mentioned, or in other formal situations. It basically means "to give", but the word "bestow" conveys the action with much grandeur and formality. For example, it is much more grand and rich to say "May God bestow His mercy upon you!" than to say "May God give you mercy." It also conveys the idea that you are unworthy or possibly undeserving of the gift, the honor, that is being given/bestowed upon you. This lifts the situation to a higher or more formal level overall. Other examples: "The mayor of the city bestowed the Award upon our school." "The University bestowed an honorary degree upon her, in recognition of her contribution to the arts". "May God bestow His strength upon you in this difficult time". I hope that this helps. Keep up the good work with your language studies!