You Can Now Invest in Alphabet With a 6% Dividend Yield, but There's a Catch

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) initiated a dividend about two years ago, paying a minuscule $0.20 per share each quarter. It's since raised that dividend to $0.22 per quarter, for a yield of approximately 0.24% on its common stock. That's not exactly a dividend that has income investors salivating.

But investors searching for yield and exposure to the massive AI stock now have another option. Alphabet recently raised $85 billion in capital by issuing new equity. About 20% of that came in the form of mandatory convertible preferred stock. Those shares currently yield over 6%, and you can buy them right now under the tickers GOOGM (tied to Class A common stock) and GOOGN (tied to Class C shares).

But there are a few important details you'll need to know before pulling the trigger on Alphabet's new high-yield shares.

Image source: The Motley Fool.

What exactly is this share class?

First, it's important to understand exactly what you're buying when you buy a share in one of Alphabet's new issues.

The shares are preferred stock. Preferred stock is a class of shares that have priority over common stock in the case of a liquidation event. They typically pay a fixed dividend, and that gets paid before the common stock dividend.

The shares issued by Alphabet are convertible to common stock, which means their value is also influenced by changes in the value of common stock. In fact, they're mandatory convertible shares, and all shareholders will see shares convert to their corresponding common stock on May 15, 2029.

That's important, because once the shares convert, the dividend yield will drop to whatever Alphabet pays on its common stock. That 6% yield will only last for the next three years. Investors looking for long-term income from their portfolio should probably look at other high-yield investment options.

Meanwhile, investors need to note the conversion rate. The number of shares each issue converts into is capped for both the upside and the downside. Shares will convert into a maximum of 0.1408 (Class A) or 0.1421 (Class C) shares, regardless of the share price. That means that if the stocks trade below about $355 (Class A) or $352 (Class C) at the time of conversion, the preferred shares will participate in any further downside.

Likewise, the minimum number of shares for conversion is 0.1126 (Class A) and 0.1137 (Class C). As a result, shares will be worth the same amount at conversion until the shares reach $444 (Class A) and $440 (Class C). The shares will then participate fully in any upside from those prices.

It's important to note that Class A and Class C Alphabet common stock currently trade very close to their downside cutoffs. Meanwhile, the upside cutoffs represent annualized returns above the 6% yield on the preferred shares. So, for the preferred shares to prove a good investment over the next three years, investors are betting that Alphabet shares will trade modestly higher, but not well past the high end of the conversion range.

While the preferred shares offer an interesting option for investors seeking income while maintaining exposure to Alphabet, most investors bullish on the company will be better off buying the common stock.

Adam Levy has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.