The stock market is having a strong start to the year. Despite a recent cooling-off period, the S&P 500 is up more than 5%. A big catalyst is the view that interest rates will start falling later this year.

Despite that looming catalyst, shares of many top real estate investment trusts (REITs) have underperformed this year. Realty Income (O 0.34%) and Prologis (PLD -1.15%) are two of the more notable laggards. Now looks like a great time to double up on those top-notch dividend stocks.

Solid built-in growth with upside potential

Realty Income's stock has fallen more than 5% this year. The primary culprit is the Federal Reserve's continued delay in cutting interest rates as it waits for inflation to fall closer to its targeted level. Rate cuts would benefit the REIT. They would lower its cost of capital by reducing its borrowing costs and likely pushing up its stock price, which would put the REIT in a stronger position to make acquisitions.

However, Realty Income can grow just fine this year without the Fed's help. It recently closed its accretive acquisition of fellow REIT Spirit Realty. Meanwhile, the combined company will generate even more excess free cash flow after paying dividends, giving it no-cost capital to fund accretive deals. The company estimates it can acquire about $2 billion of real estate this year without obtaining any additional financing. Add in rent growth, and these catalysts should enable the REIT to grow its adjusted funds from operations (FFO) by 3.3% to 5.3% per share this year. That's in line with its long-term target range of 4% to 5% annually.

Meanwhile, falling interest rates would probably enable the REIT to invest even more money into new properties this year. That could push its growth rate even higher, further supporting continued dividend growth. (Realty Income has increased its payout every year since coming public in 1994.) Add in its attractive current income yield of around 6%, and Realty income could generate double-digit total returns in the coming years from here.

Hitting a speed bump

Prologis stock has tumbled more than 20% this year. A big driver was its first-quarter earnings report, where the leading industrial REIT slightly reduced its 2024 guidance. "While operating conditions are healthy in the majority of our markets," stated CEO Hamid Moghadam in the first-quarter earnings press release, "customers remain focused on controlling costs, which is weighing on decision making and the pace of leasing." The CEO noted, "A volatile and persistently high interest rate environment, together with mounting geopolitical concerns, contribute to this indecision and its short-term effect on net absorption."

Despite that near-term slowness, the REIT still expects to grow its core FFO by nearly 8% per share this year. Furthermore, while it's taking a more cautious view for this year, it sees these "adjustments more as a matter of timing as the outlook on new supply remains very favorable," according to CFO Tim Arndt.

The company expects to grow its core FFO per share by 9% to 11% on average through 2026, assuming modest market rent growth. Meanwhile, even if market rents don't grow, it should deliver about 8.5% annual core FFO-per-share growth.

That positions the REIT to continue increasing its dividend at an above-average rate. It has delivered a 13% compound annual growth rate over the last five years, more than double the 5% average of the S&P 500 and other REITs. With its dividend yield approaching 4% after this year's sell-off, Prologis could easily produce double-digit total annual returns over the next few years as it delivers above-average core FFO and dividend growth.

Lower share prices = higher dividend yields

Top-tier REITs Realty Income and Prologis have slumped this year because the Federal Reserve is holding back on reducing interest rates until inflation is more under control. That has pushed their dividend yields up to even more attractive levels.

Both REITs can grow just fine this year even if the Fed doesn't cut rates. Meanwhile, the eventual rate cuts would be a further growth catalyst. With strong built-in total return potential and a looming upside catalyst, now's a great time to double up on these top-notch dividend stocks while they're still on sale.