Is Woodside stock a buy for its 8% dividend yield?

Woodside's dividends look fat, but proceed with caution…

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Looking at Woodside Energy Group Ltd (ASX: WDS) stock right now, one metric jumps out immediately: the ASX 200 energy share's enormous dividend yield.

Woodside shares closed at $23.85 apiece yesterday. At this price, the oil and gas producer has a dividend yield of 8.12%.

In addition, Woodside's dividend payments typically come with full franking credits attached, meaning that this yield grosses up to an even more impressive 11.6% when the value of those franking credits is taken into account.

An upfront (and fully franked) 8% yield would obviously appeal to almost any ASX investor, particularly those who prioritise dividend income.

But is this dividend yield for real? Or is it a dangerous dividend trap to be avoided? Let's dive a little deeper.

Is Woodside stock's 8% dividend yield too good to be true?

Well, first off, that 8% dividend yield is no joke. It comes from Woodside's last two dividend payments.

The first was the interim dividend investors bagged back in April, worth 60 cents per share. The second was the $1.02 per share final dividend doled out just last month on 3 October.

As we've already touched on, both of these dividends came with full franking credits attached. Plugging this annual dividend total of $1.62 per share into the current Woodside share price of $23.85, we get that dividend yield of 8.12%.

However, this does not mean that you can buy Woodside shares today and anticipate bagging an 8.12% yield going forward. As any good dividend investor knows, a company's dividend yield only reflects what has been paid out in the past, not what might come in the future.

Feast and famine

Many ASX shares try and grow their dividends slowly but steadily every year. But not Woodside. As an energy stock, Woodside's capacity to fund its dividends is cyclical and almost entirely dependent on what energy prices are doing.

When oil and gas prices are high, Woodside is able to make it rain with high dividend yields for shareholders, as we saw in 2022 and 2023. However, the opposite is also true, and when energy prices fall, we usually see Woodside's dividends dry up as well.

This paradigm helps explain why Woodside was able to fund $3.06 per share in dividends in 2022 but only $1.62 in 2024.

Predicting what kind of dividends Woodside might pay out over the 2025 financial year and beyond would therefore require a prediction on what energy prices might do. A difficult task indeed.

On the other hand, Woodside is an established energy stock that can remain profitable even if energy prices sink to lows similar to those we've seen in the past.

Foolish takeaway

So overall, I regard Woodside as a decent, if volatile, source of dividend income.

I certainly wouldn't be expecting an 8% dividend yield from the stock going forward. But I still think it would be a valuable member of a diversified, income-focused portfolio.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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