Between Registered Retirement Financial savings Plans (RRSPs), Tax-Free Financial savings Accounts (TFSAs), and First Residence Financial savings Accounts (FHSAs), Canadians have loads of tax-sheltered room to work with.
However even essentially the most diligent savers will take time to max out these accounts. For those who’ve already stuffed them, the subsequent step is normally a non-registered account. These are much more versatile – no limits on contributions or withdrawals – however each greenback of revenue is taxable, and never all revenue is handled the identical.
That creates a problem for exchange-traded fund (ETF) traders. Some ETFs are merely much less environment friendly in a taxable account than others. One choice that stands out for its tax profile is the Vanguard FTSE Canadian Excessive Dividend Yield Index ETF (TSX:VDY).
What’s VDY?
VDY is designed to trace the FTSE Canada Excessive Dividend Yield Index. The methodology screens Canadian shares for these within the high half of dividend payers, then weights them by market capitalization (share worth instances shares excellent).
This ends in a portfolio tilted towards financials and vitality shares, which dominate Canada’s high-yield universe. The fund fees a low 0.22% administration expense ratio (MER) and pays traders month-to-month, making it a easy solution to seize dividend revenue.
VDY tax effectivity
On a trailing 12-month foundation, VDY yields about 3.7%, paid month-to-month. What units it aside for non-registered accounts is the standard of its distributions. In 2024, for instance, VDY’s payouts have been damaged down as follows: $2.15701 per share as eligible dividends, $0.29367 as capital features, and $0.00071 as return of capital.
Every of those payout varieties is extremely tax-efficient in Canada. Eligible dividends obtain the dividend tax credit score, capital features are taxed at solely 50% of your marginal charge, and return of capital reduces your price foundation and isn’t taxable till you promote.
Simply as essential, there have been no crimson flags – no overseas revenue, no peculiar revenue, and no belief distributions which might be widespread in ETFs holding worldwide shares, bonds, or actual property funding trusts. That makes VDY far cleaner in a taxable account than many friends.
The Silly takeaway
VDY is likely one of the greatest Canadian dividend ETFs to carry in a non-registered account in case your purpose is month-to-month revenue. It combines tax-efficient distributions, a low charge, and a historical past of efficiency – its 10-year annualized return with dividends reinvested is 12.4%, outpacing the S&P/TSX 60 Index. For Canadians wanting past registered accounts, VDY makes a robust case as a foundational holding.
