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Many investors in mutual funds to reap some of Microsoft payout

By MEG RICHARDS
The Associated Press

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Guess again. If you have anything resembling a diversified portfolio, chances are 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 some $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 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 as part of their annual distribution.

For Vanguard 500, that means paying some $300 million out to more than 2 million investors — effectively raising the fund's annual distribution by about 30 cents a share, said Gus Sauter, Vanguard's chief investment officer.

For a person with a $10,000 investment in the fund, that translates to an extra $30 — which isn't likely to change anyone's lifestyle.

Most of Vanguard's shareholders reinvest their dividend distributions, anyway, Sauter said.

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 may not typically pay a yield, the one-time dividend may bring some unexpected tax consequences, said Don Cassidy, senior research analyst with fund tracker Lipper.

If Microsoft makes up 5 percent of the fund's assets, the dividend could boost its yield by half a 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," 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.

Copyright © 2004 The Seattle Times Company

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