DRIPs: dividend reinvestment plans explained
How DRIPs work: company plans vs broker DRIPs, fractional vs whole shares, synthetic DRIPs, plan discounts, and why reinvested dividends are still taxable.
- A DRIP turns each dividend into more shares automatically, which compounds your share count.
- Company plans and broker plans differ on fractional shares, discounts and convenience.
- Synthetic DRIPs buy whole shares only and pay any remainder in cash.
- Reinvested dividends are taxable in non-registered and US taxable accounts.
- Each reinvestment adds to your cost base; tracking it avoids overpaying tax later.
How does a DRIP work?
On each payment date, instead of depositing cash, the plan uses your dividend to buy additional shares. Next quarter, those new shares earn dividends too, which buy a few more shares, and so on. Over long periods the share count compounds without you lifting a finger.
Most DRIPs charge no commission on reinvested purchases, though terms vary. Enrolment is usually per holding, so you can reinvest some dividends and take others as cash.
Company DRIPs vs broker DRIPs
| Feature | Company-run DRIP | Broker DRIP |
|---|---|---|
| Who runs it | The company, usually through its transfer agent | Your brokerage |
| How you hold shares | Often registered in your name with the transfer agent | In your brokerage account |
| Fractional shares | Commonly yes | Often whole shares only (synthetic) |
| Discount to market price | Some plans offer one | Varies; check the broker’s terms |
| Optional cash purchases | Some plans allow extra cash contributions | Buy through your regular account |
| Convenience | Separate statements per company | Everything in one place |
Fractional vs whole shares: what is a synthetic DRIP?
Many brokers run synthetic DRIPs: they reinvest only enough to buy whole shares and pay the leftover as cash. Company-run plans more often buy fractional shares, so every dollar goes back to work.
Hypothetical example: you own 150 shares of Company K, which pays $0.48 per share quarterly. Your dividend is 150 × $0.48 = $72.00, and the share price on the reinvestment date is $30.00.
- Full (fractional) DRIP: $72.00 ÷ $30.00 = 2.4 new shares. All $72 is reinvested.
- Synthetic DRIP: 2 whole shares at $30.00 = $60.00 reinvested; $12.00 paid in cash.
- Plan with a hypothetical 2% discount: purchase price $30.00 × 0.98 = $29.40, so $72.00 ÷ $29.40 ≈ 2.449 shares.
In a synthetic DRIP, if a dividend is smaller than one share’s price, nothing is reinvested and the whole dividend arrives as cash. With 40 shares of Company K, the $19.20 dividend can’t buy a $30.00 share.
About plan discounts
Some company-run plans let participants buy reinvested shares at a small discount to the market price. Whether a discount exists, how big it is, and whether it applies to optional cash purchases is set by each plan’s terms, and companies can change or remove it. Read the plan document rather than assuming.
A discount helps compounding a little, but it doesn’t change the fundamentals of the company. When a plan issues new shares from the company’s treasury, the total share count rises slightly too.
What are the trade-offs of reinvesting?
- Automatic compounding: every dividend goes back to work without you placing an order, often with no commission.
- Regular buying: purchases happen every payment date at whatever the price is, so you buy more shares when prices are lower and fewer when higher.
- Growing concentration: reinvesting into the same company keeps adding to that position, which can tilt a portfolio over time. See sector concentration risk.
- Tax without cash: in a taxable account, you may owe tax on dividends that never reached you as cash.
- Recordkeeping: every reinvestment is a small purchase that changes your cost base.
- No price choice: the plan buys on its schedule, not when you think the price is attractive.
Are reinvested dividends taxable?
Yes, in taxable accounts. In Canada, dividends reinvested through a DRIP in a non-registered account are taxable in the year they’re paid, even though no cash reaches you. In the US, reinvested dividends are still taxable dividends. Registered and tax-advantaged accounts follow their own rules, and US withholding can still apply to US dividends in some of them. See the tax hub and US dividends in a TFSA.
Because the reinvested amount was already taxed as a dividend, it becomes part of what you paid for the shares. In Canada, each reinvestment adds to your adjusted cost base (ACB).
Tracking your adjusted cost base: a worked example
You buy 100 shares of hypothetical Company L at $25.00 in a non-registered account. It pays $0.50 per share quarterly, and the plan reinvests at the prices shown.
| Event | Cash reinvested | Price | New shares | Total shares | Total ACB | ACB per share |
|---|---|---|---|---|---|---|
| Initial purchase | n/a | $25.00 | 100 | 100 | $2,500.00 | $25.00 |
| Q1 dividend | 100 × $0.50 = $50.00 | $25.00 | 2 | 102 | $2,550.00 | $25.00 |
| Q2 dividend | 102 × $0.50 = $51.00 | $25.50 | 2 | 104 | $2,601.00 | $25.01 |
| Q3 dividend | 104 × $0.50 = $52.00 | $26.00 | 2 | 106 | $2,653.00 | $25.03 |
If you later sold all 106 shares and reported a cost of only $2,500, you would overstate your capital gain by $153, the dividends you already paid tax on. See DRIPs and adjusted cost base.
Frequently asked questions
Does a DRIP make a company’s dividend safer?
Can I use a DRIP in a TFSA or RRSP?
How do I see what DRIPs might add up to over time?
Education, not advice. This site does not recommend, rate or rank any security and does not know your full situation. Check tax details with the CRA or IRS, or a qualified professional. Read the disclaimer.
Primary sources
- CRA — T4037 Capital Gains guide (adjusted cost base)
- Canada–United States Tax Convention, consolidated text (Department of Finance Canada)
- IRS — Publication 550, Investment Income and Expenses
- IRS — Instructions for Form 1099-DIV
Rules checked October 31, 2026. Tax rules and rates change; confirm current details on the official pages above.