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In my opinion, Dill does this because of the relationship (or lack thereof) with his father in real life. In real life, Dill's parents do not seem to have much time for him. They love him, but they do not spend time with him.
Because of this, you can see where he might want to compensate. So he makes up all these stories about him and his father. In the stories, they do all sorts of things together. This makes it seem as if his dad really has a lot of time for him even though in real life he does not.
Dill appears to be a very lonely boy. He first meets Jem and Scout when he visits his grandmother and elderly relatives. He is young and in need of friendship. His parents are separated and he has been moved about. He has the opportunity to observe Scout, Jem's, and Atticus' relationship. His relationship is lacking the closeness that he desires. In order to compensate for that which he desires but does not have, Dill makes up stories to fill in his lonely gaps.
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