Simply speaking, a dividend payout scheme returns back a portion of an investors own money. Full Stop ! When and How much is upto the descrition of the company (thats why it cannot be a guranteed source of income as otherwise thought and promoted by many). Why does an MF declare a dividend? One reason might be there is no asset worth investing in the market at the moment. e.g. when markets are over-heated. Other reason might also be to attract new investors to the fund luring them to grab this "income".
For e.g. if you have invested $100 in a scheme which declares a 2 $ dividend, then your investment in the scheme now becomes 98$ if you had opted for a dividend pay-out scheme with the 2$ returned to you. Its as simple as that. Its upto you to decide what to do with that 2$. There are also some tax implications with dividends but i will leave them out from this discussion. The point is the term "dividend" seems so attractive that mis-informed investors easily fall prey to all the positive marketing about such schemes. They also plan their investment (in some cases even encouraged by the investment advisors!) close to the schemes dividend declaration date to capture that "dividend" because there is a gap between when the company declares a dividend and the time the money reaches the bank account.
My personal recommendation would be to invest in an MF (scheme suited to your equity-debt exposure) with a good track-record atleast for the past 5 years rather than falling prey to this very "attractive" dividend proposition. Finally, how much net return you make in the long-term is what really matters with or without dividends.