Has Alphabet stock become a great passive income choice?

After Amazon announced its first-ever dividend, Muhammad Cheema takes a look at whether the stock can generate a good passive income.

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Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) recently announced its quarterly results (25 April). What has investors excited is the dividend of $0.20 per share, which presents a passive income opportunity for them. The share price climbed by 14.6% after the announcement. So, let’s see if this is warranted.

Is this a great opportunity to create a second income?

The dividend is initially set for $0.20. On an annualized basis this will be $0.80 (although, we must bear in mind that dividends aren’t guaranteed). The dividend yield based on the current share price of $167.18 will therefore be 0.48%.

To generate an extra $100 a month, I’d need to buy 1,500 Alphabet shares, costing me $250,770.

That’s a lot of money to simply get an extra $100 a month. Is it really worth it? I’d say no.

If I’m investing in a company for its dividend, I generally have a rule to only look for companies with a dividend yield of at least 3%. For example, I own AbbVie shares. On an annualized basis it currently pays $6.20, which provides me with a yield of 3.88%. To get the same $100 a month, I’d only need to spend $31,082.68 on 194 of its shares. This is a far cheaper way to obtain an extra income.

However, even though Amazon is not my ideal stock to buy for passive income purposes, there are other reasons to consider buying its stock.

An impressive company

The rest of its results for the quarter impressed me even more.

Growth remains strong as sales climbed 15% to $80.5bn year on year and net income soared by 57% to hit $23.7bn.

Furthermore, its businesses continue to dominate. Google is by far the most used search engine globally, with a market share of 91%. YouTube boasts 2.49bn monthly users. Google Cloud is also growing very well, with sales rising from $7.5bn last year to $9.6bn.

Having said that, the company does face significant competitive risks. AI is an opportunity, but Alphabet faces serious competition from others such as Microsoft. For example, Microsoft’s investment in ChatGPT maker OpenAI could hurt Alphabet’s main revenue source, Google.

Although the firm responded with its own Chatbot, Gemini, it was still relatively slow to release this and ChatGPT has the first mover advantage.

Now what?

Alphabet has achieved great feats as a business, but it needs to make sure it remains competitive, especially as it’s operating in industries that are experiencing great change with the emergence of AI, and competition is only going to intensify.

However, with $108bn of cash and equivalents on its balance sheet, it has more than enough to continue investing in innovative projects. The vast majority of rivals simply can’t compete with Alphabet’s treasure chest.

Finally, even though it’s not my preferred stock for passive income, I think now might be a good time for investors to consider adding this stock to their portfolios. Its forward price-to-earnings (P/E) ratio of 25.5 might seem a tad expensive, but it’s still cheaper than many tech rivals in the US. The Nasdaq 100 in comparison is trading with a P/E of 29.6.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Muhammad Cheema has positions in AbbVie. The Motley Fool UK has recommended Alphabet and Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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