Melt butter in saucepan over medium heat, cook and stir onion until tender, about 10 minutes. Add potatoes, water, dill weed, salt and pepper to onion, bring to boil. Reduce heat and simmer until potatoes are tender and water is almost gone, at least 30 minutes.

Stir milk and bacon bits into potato mixture, bring to boil. Remove from heat, add as much cheese as you'd like, cover and let it sit for 10-15 minutes. Add more cheese and sour cream when serving.