The stock market hasn't been very forgiving to dividend-paying real estate investment trusts (REITs) this year. Interest rate pressures and general economic uncertainty have pushed many REIT stocks down 20% or more. And while the general real estate market may be slowing, several REITs are starting to pick up steam.

Simon Property Group (SPG -0.51%) and Extra Space Storage (EXR 2.82%) have dividends yields that dwarf the S&P 500 average. Despite being down 26% and 36% respectively, here's why these dividend stocks could soar in 2023.

Simon Property Group is seeing robust demand for its malls

Simon Property Group is the largest mall operator in the world, having interests and ownership in 230 high-end shopping malls and outlet centers across the U.S., Asia, and Europe. Malls were absolutely hammered during the height of the COVID-19 pandemic when in-store shopping practically ceased overnight. Retailer after retailer closed its doors in the months that followed and many filed for bankruptcy.

Simon Property Group was understandably crushed as result. The company did see growth in 2021 and 2022 as Class A malls rebounded, yet its share prices still haven't returned to pre-pandemic levels. Today the stock is down 26% year to date but there's reason to believe the shares could be picking up steam.

Occupancy levels for the mall REIT are steadily increasing. As of the third quarter of 2022, its U.S.-based properties were 94.5% occupied, a 2% improvement from the previous year and in line with 2019 levels. Its base minimum rent is also 1.6% higher than last year. If it weren't for writing down some of the losses in valuation on its assets over the past few years, the company would have seen its revenue grow year over year.

Headwinds including currency fluctuations, a potential slowdown in retail spending, and lower foot traffic could hurt malls in the short term. But malls are nowhere near dead. This makes the valuation of 10 times its funds from operations (FFO) -- a metric that works similar to price to earnings -- for a leading REIT like Simon Property Group very attractive.

The company just completed a partnership with Jamestown, a global real estate and investment management firm, which will be accretive to its balance sheet in 2023. It's also building three properties in Paris, South Korea, and Japan. Its dividend yield is about 6%, which is almost four times that of the S&P 500.

Extra Space Storage is still one of the top-performing REITs of the decade

The self-storage industry has historically been the top-performing sector among publicly traded REITs, making it an attractive industry to invest in. But Extra Space Storage holds the title of the top-performing REIT of the past decade, providing a total annualized return of 19%, nearly double its next closest peer.

The company has ownership and interests in just over 2,300 self-storage facilities, making it the second-largest self-storage company in the U.S. Like many other REITs, Extra Space Storage has been hurt by rising interest rates and the broader bear market. That pushed its share price down 36% this year despite healthy earnings.

Third-quarter same-store revenue rose 16% year over year while net income per share jumped by nearly 18%. If it weren't for impact of Hurricane Ian in the third quarter, its FFO would have grown by 19%. The company is rapidly expanding, adding 117 new facilities to its third-party management platform and acquiring 139 stores in the third quarter.

It's also strengthened its balance sheet this past year, going from net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) of 6.2 times in 2020 to 4.6 times as of Sept. 30, which would undoubtedly help the company if the economy were to weaken in 2023. Its share price is trading at about 17 times its FFO, which is an attractive valuation considering it's one of the best-performing REITs of the past decade. But its dividend history is what makes it even more alluring.

The company has increased its dividends by 500% over the past 10 years. Today it's dividend yield is more than 4% with plenty of FFO coverage to maintain its dividends for years to come.