When you own stock in a company that pays dividends, you have a choice: take the cash or use it to buy more shares. Dividend reinvestment is the second option — and for long-term investors, it can be one of the most effective ways to grow a portfolio over time.
This article covers what a dividend reinvestment plan (DRIP) is, how it works, the benefits and trade-offs, and how reinvested dividends are taxed in Canada.
What is a dividend reinvestment plan (DRIP)?
A dividend reinvestment plan (DRIP) is a program that automatically uses the cash dividends you earn from a stock, exchange-traded fund (ETF), or mutual fund to purchase additional shares of that same investment. Instead of receiving dividend payments as cash, you reinvest them — growing your holdings over time without placing manual trades.
There are two main types of DRIPs:
Issuer DRIPs. Offered directly by the company whose shares you own. They often include a small discount on the share price (typically 1% to 5%) and charge no transaction fees.
Broker DRIPs. Offered by your brokerage. You won't usually get a discounted price, but you won't pay commissions on the reinvested shares either.
Either way, the core idea is the same: your dividends go back to work rather than sitting in cash.
How dividend reinvestment works
When a company issues a dividend, the amount you receive is based on the number of shares you own. Say you earn $20 in dividends. Instead of cashing that cheque and treating yourself to a giant bag of Swedish fish and a night on the couch, you could use the money to buy more shares of the company.
If the share price is $15, you could reinvest your dividend and buy 1.33 more shares. Some brokerages require you to buy full shares, so in that example, you'd get one share and keep the leftover money in cash — either to withdraw or to hold in your account until you found your next acquisition.
Benefits of dividend reinvestment
Reinvesting dividends can quietly accelerate your portfolio's growth. Here are the key advantages:
Automatic compounding. Each reinvested dividend buys more shares, which then generate their own dividends. Over years and decades, this compounding effect can meaningfully increase your total returns.
Dollar-cost averaging. When you reinvest at regular intervals — quarterly, for instance — you buy shares at a variety of price points. This reduces the risk of putting all your money in at a market peak. (Here's more on how dollar-cost averaging works.)
No transaction fees. Most DRIPs waive commissions on reinvested shares, so more of your money goes toward buying additional stock.
Staying fully invested. Small dividend payments can sit idle in cash if you don't reinvest them. A DRIP keeps that money working instead of waiting on the sidelines.
Things to consider before using a DRIP
DRIPs have clear advantages, but they're not the right fit for every situation.
Tax complexity in non-registered accounts. Reinvested dividends are still taxable income. If your DRIP runs in a non-registered account, you'll need to track the adjusted cost base (ACB) of every reinvested share for capital gains purposes when you eventually sell.
No control over timing or price. A DRIP buys shares automatically on the dividend payment date. You can't wait for a dip or choose when to reinvest.
Concentration risk. Reinvesting dividends back into the same stock increases your exposure to that single company. If the stock underperforms, your losses compound the same way gains would.
Not ideal if you need income. If you rely on dividend payments for living expenses or cash flow, a DRIP defeats the purpose. Taking dividends as cash makes more sense in that case.
How DRIPs are taxed in Canada
Reinvesting your dividends doesn't change how they're taxed. Whether you take dividends as cash or reinvest them through a DRIP, the Canada Revenue Agency (CRA) treats them the same way.
In a non-registered account, Canadian dividends are taxed using the dividend tax credit, which offers a lower effective tax rate than interest income. Every reinvested dividend adjusts the cost base of your holdings, so you'll need an accurate record of each reinvestment to calculate your capital gains correctly when you sell. (For strategies on keeping more of your returns, see our guide to tax-efficient investing.)
In a Tax-Free Savings Account (TFSA), reinvested dividends grow entirely tax-free. In a Registered Retirement Savings Plan (RRSP), reinvested dividends grow tax-deferred until you withdraw. For both registered account types, DRIPs are straightforward — no cost base tracking required.
When dividend reinvestment makes sense
A DRIP tends to work well when you have a long time horizon and don't need dividend income today. It's a natural fit if you're building wealth gradually in a registered account, where tax complexity isn't a factor.
It can also work well in a diversified portfolio of dividend-paying ETFs, where reinvested dividends are spread across many companies rather than concentrated in one stock.
If you're approaching retirement and shifting toward income, or if you prefer to direct your cash toward new investment opportunities, taking dividends in cash may serve you better. It depends on where you are in your investing journey and what role dividends play in your plan.
