What is Distribution
Distribution occurs when the trading volume of a security is greater than that of the previous day without any price increase. Distribution is the disbursement of assets from a retirement account. The assets from the account are paid directly to the retirement account holder or beneficiary either electronically or by check.
BREAKING DOWN Distribution
Distribution also refers to a company's payment of stock, cash or physical products to its shareholders. Mutual fund companies give earnings and other payouts to shareholders as a distribution. Distribution is an allocation of capital gains and income that mutual funds generate for their investors periodically during a calendar year. Distribution is a payment of interest, principal or dividend by the issuer of a security to the shareholders on a regular basis.
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.
How Distributions Work
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.
Mutual funds give dividend and interest income collected from their portfolio holdings as dividends or income distribution to fund shareholders. Furthermore, capital gains from the fund’s trading activities are disbursed as capital gains distributions at the end of the year.
Explanation of Types of Distributions
Mutual fund distributions are generated from net capital gains made from the sale of a mutual fund's investments and dividend income and interest earned by a mutual fund's holdings minus the fund's operating expenses. For example, if a stock is bought for $75 and later sold for $150, the capital gains is $75 minus any operating expenses.
Distributions from 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.
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 turns age 59½, which is taken without penalty. The retirement account holder may be bound to pay income tax on distributions paid during the year.
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 declines because the distribution is withdrawn from the fund’s assets, which decreases the net asset value (NAV).
Example of Distributions
The Fidelity 500 Index Fund: Institutional Class fund disburses several distributions at year-end. For 2017, investors received a total of 47.486 cents for every share of the fund they owned. This amount consisted of 45.286 cents in qualified dividends, as well as 0.20 cents in short-term capital gains and 2 cents in long-term capital gains. Fidelity automatically reinvests distributions unless a customer specifies to direct the money into a separate fund, increasing the number of shares of the fund owned.