Dividends are the earnings of the mutual fund. During the year, most mutual funds will receive dividends and interest on the securities they own. The fund then pays its shareholders nearly all of the income (minus disclosed expenses) it has earned in the form of a mutual fund dividend. If the total passes the fund's annual expenses, you get the rest as a mutual fund dividend.
Unless the money is needed to live on (i.e. an investor is retired), many investors choose to allow the mutual fund dividend to roll back into the fund. You increase the value of your mutual, but do not receive any income at that time.
You can earn money from your mutual fund in two other ways. If the value
of the stocks increase, your investment has appreciated in value. Your price per share of the stock has increased, making your holdings more valuable. Capital gains distributions are received when a fund manager sells stock for more than she paid for them.
Even if you reinvest the mutual fund dividend, you have to pay income taxes on that money. The good news is that the income from a mutual fund dividend is taxed at a much lower income tax rate than ordinary income.
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