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Is Santos Ltd or Woodside Petroleum Limited a better dividend stock?

Given the recent flop in the price of oil, major energy producers Woodside Petroleum Limited (ASX: WPL) and Santos Ltd (ASX: STO) may not jump out as top dividend candidates, but if you avoid them you could be missing out on a huge opportunity.

Between Woodside’s contracted LNG pricing and Santos’ huge production growth profile, both companies should be high on your dividend list. But which is a better dividend stock?

Woodside Petroleum Limited

With a current (fully franked) dividend of 5.9%, Woodside looks like a strong contender to climb ahead of Santos as well as many of the big S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) listed dividend payers.

Woodside’s flag-ship Pluto LNG is now two years into 15 years of sales agreements with its two major buyers, Kansai Electric and Tokyo Gas, and contracted increases in pricing means the company is somewhat insulated against the falling oil price.

Investors only need to look at Woodside’s most recent third quarter sales revenue which was up a massive 46.4% year-on-year for proof. This will likely flow through to the fourth quarter as well and support Woodside’s generous dividend, set in U.S. dollars.

Santos Ltd

With a current (fully franked) dividend yield of just 2.7%, Santos looks to be on the back foot against Woodside’s solid dividend and reliable production.

However, Santos is just ramping up its rapid production growth which has already started to see pay-offs for investors. The company achieved its highest quarterly production in seven years in Q3 and has 90% completed its GLNG joint venture which is on track (and on budget) to deliver first production in 2015.

The falling price of oil may have a bigger impact on Santos. The company has stated it is increasing the proportion of revenue that is derived from oil-linked pricing and this amount is expected to jump from around 35% in 2012 to around 70% in 2015.

That said, the massive increase in production over the next 12 months will help Santos fund a higher dividend and the company has already begun to raise its distribution to shareholders; increasing its interim dividend by 33% to 20 cents per share (cps).

The better dividend

Woodside’s strong contracted pricing lowers the risk to the dividend and makes the company more attractive in the current market of falling oil prices. However, with shares down 15% in the last 12 months and growth about to take off, Santos looks like an attractive option for growth-focused investors.

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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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