If more of our returns are going to come from dividends in this high interest rate climate, then which ASX 200 share is the best dividend play?
Some experts say the era of reliable capital growth is over — at least for a period while interest rates and inflation remain high — and ASX 200 shares investors should focus on dividends for their returns.
Will Woodside Energy Group Ltd (ASX: WDS) shares deliver the strong and reliable passive income that income investors need in this new investment climate?
Let’s investigate.
Woodside shares delivering 11% dividend yield
There’s much more to successful income investing than simply picking the ASX 200 shares that pay the biggest dividends today.
That’s especially true with ASX resources stocks because prices for commodities like gas and oil tend to be cyclical.
They directly impact company earnings and, therefore, the dividends paid by ASX 200 energy stocks.
Having said that, right now, Woodside shares are trading on a trailing divided yield of 11%.
That’s exceptional in anyone’s book and well above the average ASX 200 dividend yield of about 4% or 5%.
Woodside paid an interim dividend of $1.60 per share on 6 October 2022. That was the largest interim dividend since 2014 and came on the back of a 400% profit surge due to high commodity prices.
Then came the all-time high final dividend of $2.154 on 5 April this year.
This equates to a total dividend payout of $3.754, and a trailing dividend yield of 11%, based on the Woodside share price of $34.21 at the time of writing on Friday.
As it’s an Australian company, you can also add 100% franking to those dividends. That makes for a grossed-up trailing dividend yield of 15.7%.
Incidentally, income investors might be interested to know that this is triple the yield of the best bank savings rate on the market today.
Dividend predictions
Looking ahead, a couple of brokers have predicted continuing above-average dividends on Woodside shares, but falling commodity pries will drag dividends lower than where they are now.
As my Fool colleague Tristan recently covered, Commsec expects the following fully franked payments:
FY23: $2.425 per share (7% yield)
FY24: $2.307 per share (6.75% yield)
FY25: $1.98 per share (5.75% yield)
As my Fool colleague James reports, Citi is forecasting these fully franked dividends:
FY23: $2.63 per share (7.65% yield)
FY24: $2.56 per share (7.5% yield)
FY25: $2.21 per share (6.45% yield)
Commodity prices
Higher commodity prices brought about by the Russia/Ukraine war have obviously benefited Woodside shares.
The company has been able to sell its oil and gas for more money, and that’s great. But it’s temporary.
The longer-term benefit is Russia’s exclusion from the supply chain, potentially leading to more demand for Woodside’s oil and gas.
After all, Woodside is the largest oil and gas producer of the ASX 200 and one of the top 10 LNG players in the world. So, it’s well-placed to capitalise on this.
ut there’s another global trend that is likely to do great things for Woodside shares in the medium term.
The next big thing to benefit Woodside shares and dividends
It’s a major multi-decade-long investment theme, and it’s only in its infancy right now: Decarbonisation.
The stocks that are going to benefit most long-term are obvious ones like ASX renewables shares. But most pure-play renewables producers are just starting out and need time to mature as companies.
In the short to medium term, energy and mining stocks are going to benefit from decarbonisation.
Why?
Because in order for the world to decarbonise, it has to build the new infrastructure required. For example, you can’t build a wind turbine without machines, which require oil for fuel.
And until every human being aged over 18 buys an electric vehicle (EV), we’re going to need petrol for transportation. And until every roof has solar panels, we’re going to need gas to heat our homes.
The examples go on and on, and the ottom line is, the transition to green energy will be slow.
This is why mining and energy stocks are still attractive in the medium term.
In fact, Woodside shares still have appeal in the long term because the company is already adapting to the emerging green energy era.
It’s developing its own green energy projects and reducing its carbon emissions.
Woodside intends to invest $5 billion in new energy products and lower-carbon services by 2030. These include hydrogen and ammonia projects, and carbon capture, utilisation, and storage.
Expansion of Woodside should also support dividends
That merger with the petroleum business of BHP Group Ltd (ASX: BHP) in June 2022 ended up being a pretty timely deal, as it added a lot of new assets to Woodside’s portfolio.
The company is also still developing some major existing projects, such as Browse, which it says is Australia’s largest untapped conventional gas resource.
All of this means Woodside has plenty of assets from which to make mony in the future. And as the world rushes to start building green energy infrastructure, it’s going to need more oil and gas.
Recent history of the Woodside share price