Between Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs), and First Home Savings Accounts (FHSAs), Canadians have plenty of tax-sheltered room to work with.
But even the most diligent savers will take time to max out those accounts. If you’ve already filled them, the next step is usually a non-registered account. These are far more flexible – no limits on contributions or withdrawals – but every dollar of income is taxable, and not all income is treated the same.
That creates a challenge for exchange-traded fund (ETF) investors. 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).
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What is VDY?
VDY is designed to track the FTSE Canada High Dividend Yield Index. The methodology screens Canadian stocks for those in the top half of dividend payers, then weights them by market capitalization (share price times shares outstanding).
This results in a portfolio tilted toward financials and energy stocks, which dominate Canada’s high-yield universe. The fund charges a low 0.22% management expense ratio (MER) and pays investors monthly, making it a simple way to capture dividend income.
VDY tax efficiency
On a trailing 12-month basis, VDY yields about 3.7%, paid monthly. What sets it apart for non-registered accounts is the quality of its distributions. In 2024, for example, VDY’s payouts were broken down as follows: $2.15701 per share as eligible dividends, $0.29367 as capital gains, and $0.00071 as return of capital.
Each of these payout types is highly tax-efficient in Canada. Eligible dividends receive the dividend tax credit, capital gains are taxed at only 50% of your marginal rate, and return of capital reduces your cost basis and isn’t taxable until you sell.
Just as important, there were no red flags – no foreign income, no ordinary income, and no trust distributions that are common in ETFs holding international stocks, bonds, or real estate investment trusts. That makes VDY far cleaner in a taxable account than many peers.
The Foolish 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, a low fee, and a history of performance – its 10-year annualized return with dividends reinvested is 12.4%, outpacing the S&P/TSX 60 Index. For Canadians looking beyond registered accounts, VDY makes a strong case as a foundational holding.
