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Woodside Petroleum Limited’s juicy 7% dividend yield

Included in Woodside Petroleum Limited’s (ASX: WPL) full-year result was the news that the company had increased its final dividend by 58% to US$1.03 per share. Combined with a special dividend of US$0.63 paid out last May, the company’s full-year dividend comes to a juicy US$2.49 per share – a 92% increase over 2012.

Energy producers are not often considered for their dividend yield. Some companies pay only token amounts, while many don’t pay dividends at all. Oil Search Limited (ASX: OSH) for example paid US$0.04 per share in 2012, representing a yield of just 0.005% on the share price at the time.

Instead, energy producers plough profits back into the business to fund further exploration and development. This helps to grow the business over time, but can feel risky for investors if exploration comes up dry.

In 2013 Woodside had no major projects in the expensive construction phase of development which resulted in a 52% drop in capital expenditure for the year to US$590 million. In addition to strong production the significant free cash flows allowed Woodside to reduce debt by 20% and increase the payout to shareholders.

At the current exchange rate Woodside’s US$2.49 dividend means investors were rewarded with a gross (before tax) dividend yield of 7%.

Fellow energy major Santos Limited (ASX: STO) is likely to find itself in a similar situation by 2016. Later this year the Papa New Guinea LNG project which Santos has a 13.5% stake in is set for completion, while the company’s GLNG project, which it holds 30% of, is expected to be completed in 2015.

The two projects combined will significantly increase Santos’ annual production and the company forecasts a compounded annual growth rate of 6% through to 2020. At this point Santos will be producing 80-90 million barrels of oil equivalent (mmobe) annually, compared to the 51 mmobe produced in 2013.

Foolish takeaway

Woodside’s capital expenditure is expected to jump again over 2014 as the company undertakes new exploration and makes payments relating to its 25% share of the Leviathan LNG project. But for now the company can boast one of the best yields in the energy sector at a massive 7%.

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Motley Fool contributor Regan Pearson does not own shares in any company mentioned.

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