Why I Love the Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY)

In Canada, Vanguard is best known for its globally diversified asset allocation ETFs. My personal favourite, though, is the Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY).

Put simply, this is a well-designed fund that delivers on performance, tax efficiency, and cost. In my opinion, it’s a cut above most other Canadian dividend ETFs.

High Yield with Strong Total Return

A common knock against dividend ETFs is that, even with reinvested payouts, they often lag broad market, cap-weighted funds. VDY is one of the few exceptions. It tracks the FTSE Canada High Dividend Yield Index, which holds 58 large, mid, and small-cap stocks that rank in the top half of the market on forward dividend forecasts.

What makes VDY stand out is the consistent tilt toward value and quality. As of August 31, 2025, it trades at 14.4 times earnings, 1.8 times book value, with a return on equity of 11.9% and earnings growth rate of 13.9%. Compare that to the broader FTSE Canada All Cap Domestic Index at 19.3 times earnings, 2.3 times book, 11.4% ROE, and 13.5% earnings growth. That dividend screen effectively sharpens exposure to cheaper but still higher-quality companies.

This also produces a solid income profile: a trailing 12-month yield of 3.67% with monthly distributions. With reinvested payouts, VDY has delivered an 11.52% annualized return over the past 10 years. For context, the iShares S&P/TSX 60 Index ETF (XIU) returned 10.88% over the same period.

Low Fees for What It Does

VDY isn’t technically the cheapest Canadian dividend ETF right now. That title belongs to the Hamilton CHAMPIONS™ Canadian Dividend Index ETF (CMVP), which has a 0% management fee through January 31, 2026. But VDY is still among the most cost-effective in its category.

Compare it to iShares Canadian Select Dividend Index ETF (XDV), which charges 0.55%, or iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ), which comes in at 0.66%. At 0.22%, VDY offers a straightforward, rules-based approach at a price that makes sense for both analysts and investors.

In an environment where some funds advertise eye-catching double-digit yields propped up by return of capital while quietly hiking fees, it’s refreshing to see a no-frills product priced reasonably.

Strong on Tax Efficiency

Dividend ETFs often fall short on an after-tax basis, which is why they’re best prioritized for tax-advantaged accounts like RRSPs, TFSAs, and FHSAs. Still, some are better than others, and VDY sits near the top when it comes to tax efficiency.

In 2024, VDY paid out $2.45139 per unit in total distributions. Of that, $2.15701 came as eligible dividends, which are taxed at a preferential rate for Canadian investors. Another $0.29367 was distributed as capital gains, which are only 50% taxable. Just $0.00071 showed up as return of capital, a negligible amount that simply reduces cost basis rather than creating immediate tax drag.

Importantly, VDY had no non-eligible dividends, no other income, and no foreign income. For a Canadian dividend ETF in a non-registered account, that’s about as clean a tax profile as you can hope for.

My Final Thoughts on VDY

VDY isn’t flawless. A fair critique is its heavy 50% sector tilt into financials, mainly banks and life insurers. That’s hard to avoid given the makeup of the Canadian market, and if you’re narrowing further into high-yield names, the investable universe shrinks even more. Still, if you’re uncomfortable with half your ETF tied up in Canadian financials, this isn’t the right fit.

I’d also like to see stricter sector caps. Letting winners run is usually good, but combined with loose rules on single-stock weights, Royal Bank now sits at around 15% of the fund. It’s a top-tier Canadian dividend name, no doubt, but if VDY is your core position, that exposure makes you heavily concentrated.

That said, I don’t think either issue outweighs the advantages outlined earlier. Solid performance, strong yield, low costs, and excellent tax efficiency are why VDY continues to rank at the top of my list for Canadian dividend ETFs.