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Yep works, but as you suspected, you cannot copy them to another Kindle easily (perhaps you could copy the respective annotations file and the other Kindle would recognize it) and annotations of PDFs will not transfer to the cloud, even if the PDF is stored in the cloud...
However, annotations made in PDFs will be stored in a txt file (myclippings.txt, where each and every annotation that you make on the Kindle is stored) which you can upload to a service like clippings.io which sorts the clippings according to book and location and lets you copy and export text...
Dictionary lookup is no problem. If the PDF contains text and not just images (this of course if important for annotating the file as well), you can look up words in the dictionaries and Wikipedia.
Enjoy!
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