Should you buy Woodside Petroleum Limited for the 9% dividend yield?

Woodside Petroleum Limited (ASX:WPL) is paying out a massive dividend, but can it last the distance?

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Have the directors of Woodside Petroleum Limited (ASX: WPL) gone crazy?

Interest rates are at historic lows and oil prices are plunging, but the big energy producer yesterday announced a 40% increase to its final dividend. The final dividend of US144 cents per share (cps) pushes Woodside's full-year dividend to US255 cps, which at current exchange rates lavishes investors with a huge annual yield of 9.1%, plus franking credits!

Such a yield is rare enough for an S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) listed company, but for an energy producer it's almost unheard of.

By comparison Beach Energy Ltd (ASX: BPT) currently offers a trailing dividend yield of 3.5%, while Santos Ltd (ASX: STO) offers a trailing yield of 4.25%. Both companies are yet to report their most recent results.

The devil is in the detail

For Woodside's dividend, though, the devil is in the detail. Although the company announced an impressive full year result, the total dividend for 2014 is only 2% higher than the year prior. The real benefit for Aussie investors will come from the plummeting Australian dollar which is down 13% against the U.S. dollar in the last 12 months. Woodside's share price has also fallen 5% over this time which helps to boost the yield.

Is the dividend sustainable?

If you like the sound of Woodside's big dividend, you will want to know if it is sustainable. The significant free cash flows achieved over 2014 have enabled Woodside to pay down debt and establish a net cash position of US$682 million. Less debt to service puts the company in a strong position for maintaining dividends.

Although total production should hold relatively stable in the year ahead, pricing in LNG markets may come under pressure as supply ramps up in Australia and the United States. Demand for LNG may also falter if Japan, the world's largest LNG importer, re-starts some of its nuclear reactors.

Longer term, Woodside will eventually need to start focusing on new capital intensive projects to grow its reserves and production. Additionally, volatile exchange rates and movements in Woodside's share price will likely mean the dividend yield fluctuates over time.

So although Woodside looks incredibly attractive for its current dividend, its sustainability in my view is less certain.

If you want to get your hands on Woodside's final dividend of US144 cps, you better be quick. Shares will trade ex-dividend on 25 February.

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

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