Investors buy shares of mutual funds, which often hold stock shares from different companies. Some of these companies issue dividends that the mutual fund pays out to the owners of the mutual fund shares.
Mutual funds also pay out any interest earned and profit made from buying and selling stock shares.
The distribution of the dividends from the stock owned by the fund and the interest earned is considered a dividend distribution from the mutual fund to the investor.
The distribution of gains from buying and selling stock shares or other assets is considered a capital gains distribution from the mutual fund to the investor.
Like some companies, mutual funds often offer dividend reinvestment programs (DRiPs) that buy additional shares of the mutual fund for the investor rather than giving the investor the cash.