Distribution Definition

Distribution has several meanings in the financial world, most of them having to do with the disbursement of assets from a fund, account or individual security to an investor. Retirement account distributions are among the most common and are required be taken after the account-holder reaches a certain age. Distribution also refers to a company's or a mutual fund's payment of stock, cash and other payouts to its shareholders.

With mutual funds, distributions represent an allocation of capital gains and dividend/interest income that the fund generates for its investors periodically during a calendar year. The net capital gains distributions come from profits from the sale of a mutual fund's investments. For example, if a stock is bought for $75 and later sold for $150, the capital gains are $75 minus any operating expenses. The exact amount of the distribution is tallied after the subtraction of the fund's operating expenses.

Once dividends and distributions are disbursed, the fund’s share price declines by the total of the per share distribution to the fund’s shareholders. The price falls because the distribution is withdrawn from the fund’s assets, which decreases the net asset value (NAV).

With securities, like stocks or bonds, a distribution is a payment of interest, principal or dividend by the issuer of the security to the shareholders or bondholders on a regular basis. When a corporation earns a profit, it can reinvest the funds in the business and pay a portion of the profit to shareholders in the form of a dividend. If the company offers a dividend reinvestment plan, the amount can be paid out by the company as cash for further shares or share repurchase.

The income generated from an investment trust is awarded to investors, typically as monthly or quarterly distributions. For this reason, distributions function similar to stock dividends. However, distributions typically offer higher yields that can be as high as 10% a year. The distributions received lower a trust's taxable income and, as a result, little or no income tax is paid.

Whatever the source, the distribution generally is paid directly to the beneficiary either electronically or by check.

Distributions from an individual retirement account (IRA) can occur at any time. However, account holders must meet specific requirements before distributions can occur from qualified plans, such as 403(b) accounts and 457 plans. After an individual turns 70½, he usually is required to start withdrawing funds from an IRA or a 401(k) plan; the exact amount of this annual required minimum distribution depends on his age and the amount in the account, as per IRS guidelines.

Retirement account distributions fall into two categories. One category is those taken prior to age 59½, which are subject to an IRS penalty and ordinary income tax. The other category is those taken during or after an individual reaches age 59½, which is taken without penalty, though the account holder is bound to pay income tax on distributions at his current tax bracket.

The tax payment reflects the fact that contributions to the account were made with pre-tax dollars. Only distributions from Roth IRAs or Roth 401(k)s can be taken without tax being due on them because Roth contributions are made with after-tax dollars.

The Fidelity 500 Index Fund, which seeks to duplicate the performance of the S&P 500, disburses dividend distributions quarterly, in April, July, October, and December. For 2018, investors received a total of $1.79 for every share of the fund they owned. Twice a year, in April and December, they also receive capital gains, which amounted to $.57 per share. Unless a customer specifies otherwise, Fidelity automatically reinvests these distributions, increasing the number of shares of the fund owned.