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The best overlooked energy dividend play?

With the falling Aussie dollar, oil and gas producer Woodside Petroleum (ASX: WPL) could be one of the best over-looked dividend plays around. Woodside paid a full year, fully franked dividend of US$1.30 per share in 2012 which was up 18% on the prior year.

With the contribution of strong cashflows form the company’s Pluto LNG production site in Western Australia, Woodside was also able to reward investors with a bonus dividend of US$0.63 per share in May this year.

The dividend payment in US dollars has previously been to the detriment of shareholders in the last 12 months. The bonus dividend, for example, was set at an exchange rate of 1.029 against the US dollar — meaning Australian shareholders received a bit less once the cash was paid out. However, with the recent drop in exchange rate, (currently sitting at 0.914) the US dollar now buys more Australian dollars. This is not good if you’re planning a holiday to the US, but it is brilliant if you’re getting paid a juicy dividend in US dollars! That’s an instant additional 10% return on the dividend.

Many other energy companies, including Origin Energy (ASX: ORG) and Santos Limited (ASX: STO), provide investors a reasonable dividend return, but the additional bonus dividend paid by Woodside, and the fact that it is in US dollars, makes it very attractive.

An added attraction is the fact that the company has not been neglecting the growth side of the business. Based on the company’s full year 2012 dividend of US$1.30 per share, dividends are up 30% over the last five years. Based on the current exchange rate and share price, Woodside’s 2012 dividend offers a gross yield of 4%, fully franked. Adding in the bonus share issue, that return climbs to 6%. Not bad when compared to the rate paid on-call bank accounts.

Woodside’s management has instigated a target dividend payout ratio of 80% of underlying net profit after tax (NPAT) for the foreseeable future while it finalizes plans on several major production projects, including a possible floating LNG vessel for the Browse Basin. This is up from the 50% targeted payout ratio initially announced in the company’s 2012 annual report and the next scheduled dividend is the interim dividend to be paid in October.

Foolish takeaway

There is no guarantee the exchange rate will stay at its current rate for any period in the future, nor that Woodside will offer shareholders another bonus dividend. But with continuing strong cashflows and shares in the company up just 2.4% for the year, it does look like Woodside’s potential as a strong dividend play has been overlooked.

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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.

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