Understanding the difference between a dividend and a distribution requires that we dig a little deeper into stocks and mutual funds. Both dividends and distributions represent cash payments, but the differences lie in their sources.
Dividends are payments made by companies to their shareholders. They are paid out of the earnings, or profits, of the company. Shareholders receive the dividends as a cash payment. Sometimes the company provides an automatic reinvestment plan, so that instead of a cash payment, the dividends are used to purchase additional shares of the company. Companies are not obligated to pay dividends, but large companies tend to have stable and predictable dividend policies to attract investors. Small companies that are growing quickly, on the other hand, typically do not pay dividends because they reinvest the profits to continue to build the company.
Mutual Funds, Dividends and Distributions
A mutual fund is an investment that pools money from a number of investors to buy the stocks of a number of companies. When the stocks that a mutual fund hold pay dividends, the mutual fund distributes the dividends to the owners of the mutual fund.
Other Types of Distributions
Mutual funds can purchase other investments, too, including bonds, foreign currency, real estate, and derivatives. They also sell stocks at a profit and earn capital gains. All of these earnings, summarized as dividends, interest and capital gains are distributed back to the mutual fund investors. So distributions include more than just dividends; they include all the returns a mutual fund earns.
More about Distributions
For tax reasons, mutual funds distribute all of the dividends, interest and capital gains they earn to you. But mutual Funds will give you options about whether the distributions are paid in cash or whether they are used to automatically purchase more units of the mutual fund. Distributions may be daily, monthly, quarterly or annually. The distribution frequency is clearly spelled out in the mutual fund's prospectus.
Jim Priebe has been writing and publishing since 1992, when he self-published the newsletter "Spiritually Speaking." His next assignment was with a small-town newspaper in which he authored the column "Environmentally Sound." Later he wrote Web content and maintained a blog for a community radio station. He holds a master's degree in economics from Queen's University and studied radio broadcasting at Humber College.