Donepezil is used to slow the decline of people with mild to moderate dementia.
But it tends not to be given to patients in the late stage of the disease, because of a lack of evidence that it helps.
However the study of 295 people led by University College London experts, has produced evidence that challenges that.
The participants were split into groups with some being given donepezil, some another dementia drug memantine and others a dummy pill, the journal Lancet Neurology reported.
Of those given donepezil, sold under the brand name Aricept, 20% were living in a nursing home within a year, compared to 37% of those not given it.
The study is part of a follow-up analysis of data first collected three years ago, which showed some improvement when the drug was given to people with moderate to late-stage dementia.
Researchers said more investigation was needed to fully unpick the reasons for a nursing home admission.
But they said their study provided evidence that needed to be considered when it comes to prescribing practices.
Some 60,000 people in the UK take the drug which helps to maintain brain function and the ability to cope with everyday activities such as eating and dressing.
About 70% of older people in care homes and nursing homes have dementia - with the average cost of that care ranging between £30,732 and £34,424.
Although such care is means-tested, a large chunk of the cost is borne by the individual.
In comparison, a year's supply of donepezil can cost as little as £21.59, according to the Alzheimer's Society.
Lead researcher Prof Robert Howard said: "Our previous work showed that, even when patients had progressed to the moderate or severe stages of their dementia, continuing with donepezil treatment provided modest benefits in cognitive function and in how well people could perform their daily activities.
"Our new results show that these benefits translate into a delay in becoming dependent on residential care, an event that many people dread."
Dr Doug Brown, director of research and development at the Alzheimer's Society, which co-funded the trial together with the Medical Research Council (MRC), said: "These robust findings are of real significance to people with dementia who want to continue living at home for as long as possible. We urge clinicians to consider the implications of this research and adjust their prescribing patterns accordingly."
Ref : http://www.thelancet.com/journals/laneur/article/PIIS1474-4422(15)00258-6/abstract