What Are Dividend Reinvestment Plans?

DRIPs let you reinvest dividends into more shares instead of cash. Learn how they work, their tax impact, pros and cons, and how to get started.

Dividend Reinvestment Plans (commonly known as DRIPs) offer a simple way for investors to reinvest dividend income back into a company by buying more shares instead of receiving cash. It’s a strategy designed to maximise long-term growth through compounding, and it can be especially powerful for investors who prefer to build wealth rather than withdraw income.

This guide covers what DRIPs are, how they work, their pros and cons, how to enrol, and how they’re taxed in the UK.

What Is a Dividend Reinvestment Plan (DRIP)?

A DRIP is a scheme that allows shareholders to automatically reinvest their dividends into additional shares in the same company. Rather than being paid a cash dividend, your money is used to buy more shares—often without paying dealing fees or at a slight discount.

DRIPs are typically offered by:

  • Publicly listed companies

  • Investment trusts and funds

  • Stockbrokers and online platforms

In some cases, DRIPs are run directly by the company’s registrar; in others, they’re facilitated through your broker account.

Advantages of DRIPs

  • Compounding growth – Reinvested dividends generate their own dividends over time

  • Low-cost investing – Many DRIPs charge no fees or offer reduced costs compared to buying shares manually

  • Automatic and hassle-free – No need to time the market or reinvest manually

  • Good for long-term investors – Ideal for those focused on accumulation rather than income

Even modest reinvestment over time can lead to significant portfolio growth, especially with stable, dividend-paying stocks.

Example of a DRIP

Suppose you own 100 shares in a company that pays a £0.50 per share annual dividend. You’re due to receive £50 in dividends.

Instead of receiving the £50 as cash, it’s automatically used to buy more shares of the company. If the current share price is £10, you’ll get 5 additional shares (or fractional shares if the scheme allows).

Next year, you’ll receive dividends on 105 shares, and so on. This creates a snowball effect—known as compounding.

What Is the Downside to Reinvesting Dividends?

While DRIPs are attractive, there are drawbacks:

  • You still pay tax on dividends—even if you don’t receive them as cash

  • You have less flexibility—you may prefer to invest in other stocks or sectors

  • Reinvestment could occur at high prices, meaning you buy at unfavourable valuations

  • Not all shares or platforms support DRIPs

  • Fractional shares may not carry voting rights

DRIPs suit patient, long-term investors who trust the company and want to hold for years.

How Do I Avoid Paying Taxes on Reinvested Dividends?

In the UK, dividend income is taxable even if you reinvest it. To minimise tax:

  1. Use a Stocks & Shares ISA – Dividends within an ISA are completely tax-free

  2. Use a Self-Invested Personal Pension (SIPP) – Tax-efficient but with access restrictions

  3. Make use of your £500 dividend allowance (2024/25)

  4. Keep dividend income under the basic rate threshold, if possible

Outside of ISAs and pensions, reinvested dividends still count toward your annual taxable income.

Why Do Companies Pay Dividends Instead of Reinvesting?

Companies pay dividends to:

  • Reward loyal shareholders

  • Attract income-focused investors

  • Demonstrate financial health and stability

  • Return profits when no better internal use exists

While reinvesting profits can drive growth, mature companies with limited expansion plans often prefer to return value to shareholders through dividends.

How to Join a Dividend Reinvestment Plan

To enrol in a DRIP:

  1. Check if the company or fund offers a DRIP – You can find this in shareholder information or on their registrar's website

  2. Apply via the registrar – Common UK registrars include Computershare, Equiniti, and Link Group

  3. If holding shares via a broker or investment platform, check if they offer automatic reinvestment

  4. Opt in and confirm your banking and shareholder details

Once enrolled, your dividends will be reinvested automatically each time a payment is due.

Final Thoughts

Dividend reinvestment plans offer a smart, disciplined way to build long-term wealth, especially for those not relying on dividend income. With the benefit of compounding and often lower fees, DRIPs are a good option for passive investors focused on portfolio growth.

Just remember: reinvested dividends are still taxable unless held in an ISA or pension wrapper, and DRIPs limit your flexibility. Always review the company’s dividend policy and consider whether automatic reinvestment aligns with your broader financial goals.