To decrease the initial investment of the compensation system in distribution networks, this paper proposes a cascaded distribution static synchronous compensator (DSTATCOM) integrated with D-y connection distribution transformer for reactive power compensation. The cascaded H-bridge DSTATCOM is connected to a group vertex-taps on the primary windings of the D-y connection distribution transformer, which the connection voltage range is chose from zero to the rated ac line voltage in theory. The proposed structure can achieve a suitable connection voltage selection based on the actual reactive power compensation requirements, thus, the voltage stress, initial investment and size of the compensation system can be greatly reduced. The equivalent model is built and the winding currents distribution is also analyzed. Based on the results of winding current distribution analysis, the compensation capacity constraint is deduced. Finally, both simulation and experimental results demonstrate the effectiveness of the proposed system.