Between Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs) and First Home Savings Accounts (FHSAs), Canadians have plenty of tax shelter to work with.
But even the most diligent savers will take time to get the most out of those accounts. If you’ve already filled them out, the next step is usually a non-registered account. These are much more flexible – there are no restrictions on contributions or withdrawals – but every dollar of income is taxable and not all income is treated the same.
That creates a challenge for investors in Exchange Traded Funds (ETFs). Some ETFs are simply less efficient in a taxable account than others. One option that stands out for its tax profile is the Vanguard FTSE Canadian High Dividend Yield Index ETF (Tsx:vdy).
What is VDY?
VDY is designed to… FTSE Canada High Dividend Yield Index. The methodology screens Canadian stocks for stocks in the top half of dividend payers and then weights them by market capitalization (share price times outstanding shares).
This results in a portfolio focused on financials and energy stocks, which dominate the Canadian high yield universe. The fund has a low management expense ratio (MER) of 0.22% and pays investors monthly, making it an easy way to capture dividend income.
VDY tax efficiency
Over a twelve-month period, VDY returns approximately 3.7%, paid monthly. What sets it apart from unregistered accounts is the quality of its distributions. For example, in 2024, VDY’s payouts were broken down as follows: $2.15701 per share as eligible dividends, $0.29367 as capital gains, and $0.00071 as capital return.
Each of these payout types is very tax efficient in Canada. Qualifying dividends receive the Dividend Tax Credit, capital gains are taxed at only 50% of your marginal rate, and the return on capital reduces your cost basis and is not taxable until you sell.
Just as importantly, there were no red flags: no foreign income, no ordinary income and no trust distributions common to ETFs that hold international stocks, bonds or real estate investment trusts. That makes VDY much cleaner on a taxable account than many peers.
The silly takeaway
VDY is one of the best Canadian dividend ETFs to hold in a non-registered account if your goal is monthly income. It combines tax-efficient distributions, low compensation and a history of performance – its 10-year annualized return with dividends reinvested is 12.4%, which is better than the S&P/TSX 60 Index. For Canadians looking beyond registered accounts, VDY makes a strong case as a fundamental holding company.
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