- The Washington Times - Tuesday, August 3, 2004

So, you’re a mutual-fund investor, you don’t own individual shares of Microsoft Corp., and you think that big dividend they’re paying out has nothing to do with you.

Guess again. If you have anything resembling a diversified portfolio, chances are that you do own Microsoft, and some of that $32 billion will trickle down to you. But you’re wise not to count your winnings yet, because, in most cases, the $3 per share payout won’t amount to much once it’s spread out across many investors.

Microsoft, the third-largest stock in the Standard & Poor’s 500, is one of the most widely held securities on the market. About 1,300 stock mutual funds own more than 1.7 billion shares of the software titan, valued at about $46.6 billion. Hundreds of funds count it among their top three holdings.

The fund with the biggest stake by far is the Vanguard 500 index, which tracks the Standard & Poor’s 500. Its nearly $2.5 billion investment in Microsoft accounts for 2.6 percent of the fund’s total assets and makes up about 0.9 percent of the software company’s 10.7 billion outstanding shares.

According to Microsoft’s plan, which still must be approved by its shareholders, the special dividend will be paid on Dec. 2 to investors of record on Nov. 17. A significant chunk will go to the many mutual funds that hold the stock. Then the payout will be passed on to fund shareholders, paying about $300 million to more than 2 million investors as part of their annual distribution.

For Vanguard 500, the distribution amounts to about 30 cents a share, said Gus Sauter, Vanguard’s chief investment officer, which isn’t likely to change anyone’s lifestyle.

Most of Vanguard’s shareholders reinvest their dividend distributions, anyway, Mr. Sauter said. Still, he added, he’d rather see Microsoft share its wealth than sit on it longer or pursue a less-than-optimal acquisition.

“You always wonder what a company will do with a big war chest,” Mr. Sauter said. “We are pleased Microsoft has decided to make this distribution. … It’s like the bird in the hand adage. We think investors are being well-served when they’re paid a dividend, because we can reinvest that or spend that, while capital gains are rather illusory.”

Outside of index funds, Microsoft is a favorite among value and equity-income managers, and its profitable and innovative history has kept it in the portfolios of many managers who invest solely in growth or tech stocks. For investors of those funds, which might not typically pay a yield, the one-time dividend might bring some unexpected tax consequences, said Don Cassidy, senior research analyst with fund tracker Lipper Inc. If Microsoft makes up 5 percent of the fund’s assets, the dividend could boost its yield by a half percentage point.

“If you have a fund that in the past paid no income distribution or a very moderate one and now you see this considerably higher yield … don’t be misled into thinking that’s a permanent condition,” Mr. Cassidy said. “Don’t let the yield on the year fake you out.”

Of course, if your investment is in a tax-deferred retirement account, such as a 401(k) or 403(b), the dividend payment won’t have tax consequences.

One of the more interesting effects that the payout will have for mutual-fund investors might be that it will expand the options for managers who are looking to buy dividend-paying stocks, said Christopher Davis, a fund analyst with Morningstar Inc.

“It doesn’t have earth-shattering ramifications, but I think it’s relevant to fund investors, simply because Microsoft is such an important and powerful company,” Mr. Davis said.

By sharing more of its wealth — in addition to the one-time $3 per share payout, the company is doubling its annual dividend to 32 cents per share — Microsoft might make its stock more attractive to a greater number of fund managers, and the move might induce some managers who already own it to seek an even larger stake, Mr. Davis said.

ASSOCIATED PRESS

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