How to Set Up a DRIP: Reinvest Your Dividends Automatically and Let Compounding Do the Work

What a DRIP does

When a company or ETF pays a dividend, the cash lands in your account. You have two choices:

1. Take the cash. It sits there until you do something with it.
2. Reinvest it. It buys more shares right away.

A dividend reinvestment plan, or DRIP, makes the second choice automatic. You switch it on once and never think about it again.

Why it matters: compounding

Reinvested dividends buy shares. Those shares pay dividends. Those dividends buy more shares. That loop is compounding, and it gets stronger every year.

A simple illustration. You invest $10,000 in a fund with a 3% dividend yield, and the share price grows 5% a year.

These are illustrative numbers, not a forecast. They assume constant returns and ignore taxes. But the pattern is real: over 30 years, the reinvested version ends up far ahead, even after counting the cash the other investor collected.

More on the math in compound interest: the cheat code.

Two kinds of DRIP

Broker DRIP (the common one). Your brokerage takes each dividend and buys more shares for you on the open market. It's free and takes one click. This is what most people use.

Company DRIP. Some companies run their own plan through a transfer agent. You hold shares directly with the company instead of at a broker. A few offer a small discount on reinvested shares. They're less convenient, and today they're mainly used by long-time shareholders.

How to set it up in the US

At most major brokerages:

1. Log in and go to account settings or account features.
2. Find dividends and capital gains or dividend reinvestment.
3. Choose reinvest for the whole account, or set it holding by holding.
4. Save.

From then on, every dividend buys more of whatever paid it. US brokers generally reinvest into fractional shares, so every cent is put to work.

When you buy a new holding, check that it's included. Some brokers apply your setting to future purchases automatically, and some don't.

How to set it up in Canada

It works the same way, with one difference.

Many Canadian brokers run a "synthetic" DRIP that only buys whole shares. If your dividend is $30 and the share price is $50, nothing is bought, and the $30 stays as cash. If your dividend is $120, you get two shares and $20 in cash.

That means a DRIP at these brokers works best once your position is large enough that each dividend covers at least one share. A few Canadian brokers do offer fractional reinvestment.

How to enable it varies: at some brokers it's a setting online, and at others you fill out a form or call. Search your broker's help page for "DRIP."

Not every security is eligible, so check your broker's list.

The tax part people miss

Reinvested dividends are still taxable income in a regular (non-registered) account. You never saw the cash, but the tax authority treats it as if you received it and then bought shares.

In the US you'll get a Form 1099-DIV. In Canada, a T5 or T3.

Two consequences:

1. You need cash from somewhere else to pay the tax. If you reinvest everything, the tax bill comes out of your pocket.

2. Your cost basis changes with every reinvestment. Each DRIP purchase is a new buy at that day's price. When you eventually sell, your gain is calculated against the total cost of everything you bought, including all those small reinvestments.

• In the US, brokers track cost basis for you and report it on Form 1099-B.
• In Canada, you're responsible for tracking your adjusted cost base (ACB). Brokers' figures aren't always right, especially if you've transferred accounts. Keep your own record. If you forget to add reinvested dividends to your ACB, you'll pay tax on that money twice.

In tax-sheltered accounts, none of this applies. Inside a Roth IRA, traditional IRA, 401(k), TFSA, RRSP or FHSA, dividends aren't taxed as they come in, and there's no cost basis to track. That makes these accounts the ideal place for a DRIP.

When to turn the DRIP off

You need the income. Retirees living on dividends want the cash.

You're rebalancing. If one holding has grown too large, reinvesting its dividends makes it larger. Taking the cash lets you direct it to whatever is underweight.

Tax-loss harvesting. In the US, a DRIP purchase within 30 days of selling the same security at a loss can trigger the wash-sale rule. Canada has a similar "superficial loss" rule. If you plan to harvest a loss, turn off the DRIP on that holding first. See tax-loss harvesting.

The holding no longer fits. Don't keep buying something automatically if you wouldn't choose to buy it today.

DRIP vs accumulating ETFs

Some ETFs, especially in Europe, are "accumulating": they reinvest dividends inside the fund and never pay them out. Most US and Canadian ETFs are "distributing": they pay cash, and a DRIP is how you reinvest it. If you own US- or Canadian-listed ETFs, you need the DRIP switched on to get the same effect.

A quick checklist

• Turn on DRIP in every retirement and tax-free account first
• In taxable accounts, turn it on if you don't need the income, and track your cost basis
• Check that new purchases are covered
• Review once a year when you rebalance

The bottom line

A DRIP is one of the few things in investing that's free, automatic and works in your favour every single quarter. Turn it on, especially in your tax-sheltered accounts, and let time do the rest. New to dividends? Start with what is a dividend?

Frequently asked questions