Dividend Reinvestment Plans (DRP): Should You Use One?
A DRP automatically reinvests your dividends into more shares. Here's how it works in Australia, the tax traps to know, and whether it suits you.
By Timothy Hirou GaschereauPublished 10 min read
Imagine every dividend you earn quietly going back to work, buying you more shares, which then pay you bigger dividends, which buy even more shares. That is the snowball in action, and a dividend reinvestment plan (DRP) is the mechanism that keeps it rolling automatically, without you lifting a finger.
Mostly it is genuinely useful. But there are a few things the brochure does not always spell out, especially around tax. This guide covers all of it. It is general information only, not financial or tax advice.
🎯 The essential: A DRP automatically uses your cash dividend to buy more shares in the same company or ETF, with no brokerage. It compounds beautifully and is hands-off. But the catches matter: reinvested dividends are STILL taxable (you can owe tax on cash you never received), every DRP purchase is a separate CGT parcel to track, and it keeps concentrating one holding. It suits long-term accumulators, not retirees needing income. You can opt in or out anytime, or do a partial DRP.
What is a dividend reinvestment plan?
A DRP is exactly what it sounds like. Instead of receiving your dividend as cash, the company or ETF issuer uses that money to buy additional shares on your behalf, issued directly to you, usually at or near the current market price. Some companies used to offer a small discount (say 1 to 2%), but many have quietly removed that perk, so check before you assume.
You opt in through the share registry that manages the company's shareholder records. In Australia the two main registries are Computershare and Link Market Services (now under MUFG). Some brokers and platforms also let you elect a DRP directly. A nice detail: DRP purchases can include fractional shares, so your full dividend gets put to work rather than leaving a small cash residual idle.
How does a DRP work? (the snowball in action)
A simple illustrative example (made-up numbers, not a forecast). Say you hold 500 shares and the company pays $0.20 per share: that is $100. Instead of $100 landing in your account, the DRP buys more shares. At a $5.00 share price, you get 20 new shares, so you now hold 520. Next payment: 520 x $0.20 = $104, buying another ~20.8 shares. And on it grows.
Here is a bonus that often gets overlooked: there is no brokerage fee on DRP purchases. Manually reinvesting a $100 dividend through a broker at $5 to $10 a trade hands back 5 to 10% in fees before you start. The DRP skips that entirely, which is exactly the kind of compounding we love around here (see our simple portfolio guide).
The benefits of a DRP
- Automatic compounding. Set it up once and the machine runs itself.
- No brokerage on reinvested amounts. A genuine saving, especially on smaller dividends.
- Removes the temptation to spend. The cash never hits your account, so it never gets absorbed into everyday spending.
- Puts small amounts to work immediately. No minimum threshold; even a $40 dividend buys something.
- Consistent, disciplined investing without effort. You buy at whatever the price is on the DRP date, smoothing your average entry over time.
The catches you need to know
This is the section most beginners skip. Do not skip it.
- You still owe tax on reinvested dividends. The ATO treats a DRP dividend exactly like a cash dividend. The full amount, including franking credits, is assessable income the year it is paid, so you can owe tax on money you never received as cash. The fix: set aside cash from other sources to cover the bill. Our guide on how dividends are taxed covers franking credits in detail.
- CGT record keeping gets complex. Every DRP purchase is a separate parcel with its own cost base and acquisition date. Ten years of quarterly dividends is 40 parcels to track when you sell. Keep every DRP statement. Some brokers now track cost base automatically, but the legal responsibility is yours. See our capital gains tax guide.
- It reduces your diversification control. A DRP keeps buying more of the same holding, so one company or ETF can quietly become an oversized slice without you actively choosing it.
- No cash flow. If you rely on dividends for living expenses (retirees especially), a DRP means no cash in hand. The compounding is real, but it does not pay the electricity bill.
The tax catch is the one that surprises people most. If your DRP dividend is $500 and you are in a 34.5% bracket, you could owe roughly $172 with no cash in hand to pay it. Franking credits help offset that, but plan for the bill so it is not a shock at tax time.
Partial DRP: a middle ground
Many registries offer a partial DRP: you choose a percentage of your dividend to reinvest and take the rest as cash. Reinvest 50% and pocket 50%, for example. You get some compounding and keep some cash flow, a sensible middle ground. Not every company offers it, so check your registry (Computershare or Link/MUFG) or broker for your specific holding.
Is a DRP right for you?
| A DRP likely suits you if... | A DRP is probably not for you if... |
|---|---|
| You are in the wealth-building phase, not drawing income | You rely on dividends for income (retirees) |
| You are a long-term investor (5+ years) | You want full control over asset allocation |
| You do not need the dividend cash | You find the CGT record keeping not worth it |
| You are fine with the tax/record keeping (or your platform auto-tracks) | You are already heavily concentrated in that holding |
Setting it up is straightforward: find your share registry (on your dividend statement or the company's investor relations page), log in and elect DRP (or set a partial one), or use your broker's settings. Just mind the record date: changes must be made before it to apply to the upcoming dividend. You can opt in or out at any time, with no lock-in.
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❓ Frequently asked questions
Are reinvested dividends taxable in Australia?
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Yes. The ATO treats reinvested dividends exactly like cash dividends. Even though no cash reaches your bank account, the dividend, including any franking credits, is assessable income in the year it is paid. You must declare it in your tax return. This applies to DRP shares whether you hold individual shares or ETFs.
Do I still get franking credits with a DRP?
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Yes. Franking credits attach to the dividend regardless of whether you take it as cash or reinvest it through a DRP. You include both the cash-equivalent dividend and the franking credit in your assessable income, and the franking credit offsets the tax you owe.
How does a DRP affect my capital gains tax?
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Each DRP purchase is a separate CGT parcel with its own cost base (the share price on that date) and acquisition date. When you sell, you calculate CGT on each parcel individually. If you hold the shares for more than 12 months from the DRP purchase date, that parcel qualifies for the 50% CGT discount. Keep all your DRP statements.
Can I do a partial DRP?
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Many share registries and some brokers offer a partial DRP, where you reinvest a set percentage of your dividend and receive the rest as cash. Check your registry (Computershare or Link/MUFG) or broker platform to see if this option is available for your specific holding.
Is there brokerage on DRP shares?
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Generally no. One of the key benefits of a DRP is that the shares are issued directly to you without brokerage or transaction fees. This is a real saving compared to manually reinvesting small dividend amounts through a broker, where fees can eat a significant percentage of small payments.
Can I opt out of a DRP at any time?
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Yes. You can usually opt in or out of a DRP at any time through the share registry or your broker. Just make sure you make the change before the record date for the upcoming dividend, or the change will take effect from the following dividend payment.
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Some links above are affiliate links. If you buy through them, Snowball Invest may earn a small commission at no extra cost to you. We only recommend books we'd suggest anyway.
Sources
This article is general information only, not financial or tax advice. It does not consider your objectives or circumstances. Reinvested dividends are taxable, and CGT rules apply on sale. Consider a registered tax agent or licensed financial adviser for your situation.
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General information only. This article is educational and does not constitute personal financial advice. It does not account for your circumstances. Consider your own situation and seek advice from a licensed adviser before acting. Read our full disclaimer.
Timothy Hirou Gaschereau
Founder of Snowball Invest, not a financial adviser.
I write about what I'm learning myself, because nobody ever taught us how to take control of our own money. It's a skill, not a mystery, and it's never too late to learn it. The best day to start was yesterday, the second best is today.
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