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I would ditch the Saga share price and buy these FTSE 100 dividend stocks

The last time I covered Saga (LSE: SAGA), I concluded the company offered an attractive risk-reward ratio as its turnaround continued, and investor sentiment towards the business improves.

I still think the company could produce positive returns for investors over the next 12 months. However, after rising nearly 20% in just over a month, I think it could be time for investors to take profits. 

The Saga share price has risen on little news although, at the end of January, the company did inform investors it expects to report earnings for 2018 in line with market forecasts (City analysts are predicting earnings per share of 12.9p for fiscal 2019). 

On this basis, the shares are trading at a forward P/E of 9.2, which is still cheap, but nowhere near as cheap as the valuation of just 7.9 times forward earnings placed on the company when I offered my ‘buy’ recommendation back in January. The dividend yield has also declined from 8.7% to 6.8%.

A cheaper buy 

I would recycle the profits from Saga into struggling advertising giant WPP (LSE: WPP). Just like Saga, this is a turnaround opportunity. Having lost more than half of their value over the past two years, shares in this advertising group are currently trading at a forward P/E of just 7.9. 

To some extent, this low valuation is warranted. Analysts are predicting a 23% decline in earnings per share for 2018, although earnings are expected to stabilise in 2019.

But in my opinion, the market is being too pessimistic. Investors are concerned that WPP won’t be able to adapt to the new advertising environment, where Facebook and Google dominate the market. However, WPP is still an industry giant with £13bn of revenues projected for 2018. 

I’m not expecting WPP to shoot the lights out with growth anytime soon, but I do believe even a slight improvement in its fortunes could result in a substantial re-rating of the stock. I think if profits start to grow again, the shares could be worth around 12 times earnings (the historical average), implying an upside of nearly 50% from current levels. 

With a dividend yield of 7.1% on offer as well, the potential return from an investment in WPP could be substantial over the next three years.

Income champion 

As well as WPP, I also like the look of FTSE 100 dividend champion BHP (LSE: BHP). Over the past five years, this company has transformed itself into one of the most profitable mining groups in the world and investors are reaping the benefits. 

During the past six months alone, the company has returned $13.2bn to shareholders via both dividends and buybacks. A large chunk of this, $10.4bn, was the disposal proceeds from the sale of the group’s onshore US shale oil assets, which won’t be repeated. However, considering the fact that BHP generated $6.7bn of free cash flow in the first half of its 2019 financial year, I think the prospects for shareholder returns over the next few years are exciting.

City analysts have pencilled in a total dividend yield of 8.4% for the company’s fiscal 2019, falling to 5.5% for 2020. 

Even though the stock isn’t particularly cheap, it currently trades at a forward P/E of 12.5, I think this dividend potential is worth paying a premium for. And that’s why I’m recommending BHP as an investment for your portfolio today.

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Rupert Hargreaves owns no share mentioned. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former Director of Market Development and Spokeswoman for Facebook and sister to CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares) and Facebook. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.