DRIP vs Scrip Dividends
UK companies often give investors the option to reinvest dividends automatically. Two of the most common mechanisms are the Dividend Reinvestment Plan (DRIP) and the Scrip Dividend scheme.
Both let you receive shares instead of cash, but they work differently and have different advantages depending on your account type and investment goals.
What is a DRIP?
A Dividend Reinvestment Plan (DRIP) uses your cash dividend to buy more shares of the company in the market. DRIPs are usually operated by registrars such as Equiniti, Link Group, or Computershare.
Key characteristics of DRIPs:
- Shares are bought in the open market
- You may acquire fractional shares
- A small dealing fee often applies
- Dividends are treated as cash payments for tax purposes
What Is a Scrip Dividend?
With a Scrip Dividend, the company issues new shares directly to shareholders instead of paying a cash dividend. No shares are bought in the market.
Key characteristics of Scrip dividends:
- New shares are created
- No dealing fee
- Shareholders receive whole shares only (no fractions)
- Still counted as dividend income for tax purposes
Many FTSE 100 companies offer scrip dividends during periods when they want to conserve cash.
Side-by-Side Comparison
| Feature | DRIP | Scrip Dividend |
|---|---|---|
| Shares acquired | Purchased in the market | Issued by the company |
| Fractional shares | Often allowed | Not allowed |
| Fees | Small dealing fee | No fee |
| Tax treatment | Taxed as a normal dividend | Taxed as a normal dividend |
| Impact on company | No dilution | Shareholder dilution |
| Availability | Most FTSE companies via their registrars | Only offered by some (often larger) companies |
Which Is Better for UK Investors?
Best for ISA or SIPP Investors
Either option works well inside an ISA or SIPP, because dividends are not taxed. However, DRIPs may be preferable due to the ability to buy fractional shares and compound more efficiently.
Best for Share Certificate Holders
Many paper share certificate holders favour DRIPs because:
- They provide automatic reinvestment
- They offer fractional shares
Scrip dividends may also be attractive, particularly due to their zero dealing fees.
When Scrip Dividends Are Preferable
Scrip dividends may be better if you want:
- to avoid dealing fees entirely
- to support a company conserving cash
- simple whole-share allocations
When DRIPs Are Preferable
DRIPs are often better when:
- fractional shares matter for compounding
- you want more consistent reinvestment
- the company does not offer a scrip option
Interactive: "Which Should I Choose?" Helper
Answer three quick questions to see whether a DRIP or Scrip dividend may suit you better.
Summary
Both DRIPs and Scrip dividends allow dividend reinvestment, but they work differently. DRIPs buy shares in the market (often with fractional units), while Scrip dividends issue new shares with no dealing fees. The best option depends on your investment account, costs, and how important fractional shares are to your compounding strategy.