Labor Day Stock Sale: 2 Dirt Cheap Stocks to Buy Right Now

Key Points

• Energy Transfer trades at the second-lowest valuation in the energy midstream sector.

• Realty Income trades at a discount to other REITs.

• 10 stocks we like better than Energy Transfer ›

The market is getting more expensive as stocks continue to rise. The S&P 500's nearly 15% rally over the past year has pushed its price-to-earnings ratio up to more than 25 times. That's higher than the 24 it was a year ago and well above its high-teens average over the past decade.

While the market as a whole is rather expensive, some stocks still trade at much more reasonable valuations. Energy Transfer (NYSE: ET) and Realty Income (NYSE: O) currently trade at dirt cheap levels. This makes them ideal stocks to buy for those seeking Labor Day bargains.

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A dirt cheap energy stock

Energy Transfer currently trades at less than nine times its EV/EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortization). That's the second-lowest valuation in the energy midstream sector, where the average is around 12 times EV/EBITDA.

The midstream giant's bottom-of-the-barrel valuation doesn't make much sense. Energy Transfer is currently in the strongest financial position in its history, with its leverage ratio now in the lower half of its 4.0 to 4.5 target range.

Energy Transfer is growing at a solid rate. The master limited partnership (MLP) has grown its adjusted EBITDA at a 10% compound annual rate over the past five years. While it expects growth to slow to a mid-single-digit rate this year, it anticipates a reacceleration in earnings growth in 2026 and 2027 as a major wave of growth capital projects comes online. The MLP recently added several more expansion projects to its backlog, extending its growth visibility through the decade. It also has additional projects in development and has the financial flexibility to continue approving new capital projects and making acquisitions as opportunities arise.

Energy Transfer's low valuation is a big reason it offers such an attractive income yield; it currently pays out 7.5%. The company anticipates growing its distribution by 3% to 5% annually. That makes it an appealing investment for those seeking passive income and are comfortable receiving the Schedule K-1 Federal Tax Form that the MLP sends its investors each year.

High-quality real estate at a low price

Realty Income currently trades at around 13 times its funds from operations (FFO). That's well below the roughly 18 times FFO multiple of the average real estate investment trust (REIT) in the S&P 500. This low valuation is why its dividend yield is around 5.5% while the REIT sector average is closer to 4%.

Instead of trading at a discount, Realty Income should fetch a premium valuation compared to its peers. The company's total operational return (dividend yield plus FFO per share growth rate) has outperformed other REITs over the past one-, three-, and five-year periods.

Realty Income is in an excellent position to continue growing shareholder value in the future. The company expects to maintain its growth momentum by leveraging one of the 10 best balance sheets in the REIT sector and continuing to acquire income-producing properties. It typically invests billions of dollars into new properties each year, supporting steady growth in FFO.

The REIT's growing portfolio enables it to routinely increase its dividend. Realty Income has raised its payment 131 times since its public market listing in 1994, including the past 111 quarters in a row.

Dirt cheap dividend stocks

Energy Transfer and Realty Income currently trade at ridiculously low valuations considering their consistent growth and financial strength. As a result, they offer attractive dividend yields. This combination of features makes them look like great stocks to buy right now as they have the potential to produce strong total returns in the future. Like most Labor Day Sales, these bargains might not last long.

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Matt DiLallo has positions in Energy Transfer and Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.