Review of VDY – Vanguard FTSE Canadian High Dividend Yield Index

The Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY) is an excellent choice for Canadian investors looking to maximize their passive income through dividends. This fund focuses on large Canadian companies that offer high and stable returns. In this article, we will explore the features of VDY, its historical performance, and why it stands out among the top dividend ETFs in Canada.

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VDY Overview

Why Choose VDY for Dividends?

1. High and Stable Dividend Yield
   One of the main attractions of VDY is its attractive dividend yield, typically around 4% to 5%. Additionally, the dividends are paid monthly, making it an excellent choice for investors seeking regular income.
2. The Tax Advantage of Canadian Dividends
   One of VDY’s major benefits is its high dividend yield, generally around 4% to 5%, combined with favorable tax treatment for Canadian investors. Unlike interest or foreign dividends, eligible Canadian dividends benefit from a tax credit, which reduces the tax owed.

Comparison of Investment Income Taxation

The table below shows how much remains after tax from $1,000 of investment income:

📌 Canadian dividends are favored due to the tax credit, reducing the tax paid compared to interest income.

Exposure to Top Canadian Companies

VDY includes solid companies that dominate their industries and are known for their financial stability. Here are the key sectors and some of the companies included in the fund:

Financial Sector (~55%): RBC, TD, BMO, Scotiabank

Energy Sector (~30%): Enbridge, TC Energy, Suncor

Telecommunications (~10%): BCE, Telus, Rogers

These companies have an impressive track record of growth and dividend distribution.

Example Calculation: Investing $10,000 in VDY

Let’s assume you invest $10,000 in VDY with an estimated dividend yield of 4.5% (average value).

Step 1: Calculate Annual Dividends

The dividend yield means you receive 4.5% of the invested amount each year:

📌 $10,000 × 4.5% = $450 per year

Step 2: Monthly Dividends

VDY pays dividends every month, so to find the monthly amount:

📌 $450 ÷ 12 months = $37.50 per month

Scenario with Dividend Reinvestment (DRIP)

If you reinvest your dividends, your capital will grow over time thanks to compound interest.

🔹 Let’s assume an 8% annual growth rate (total return including capital appreciation and dividends).
🔹 After 10 years, your investment could grow to approximately $21,589, with higher monthly dividends.

One of the main attractions of VDY is its focus on high dividend yields. The index it follows is designed to include companies that provide above-average dividend yields, which can result in a more substantial income stream for investors compared to a broader index that includes lower-yielding stocks. Investors should be aware, however, that a focus on high yield may sometimes expose them to companies whose dividend payments may not be sustainable in the long term if underlying earnings weaken.

4. Sector Concentration Risk

While VDY offers high dividends, it comes with concentration risks, particularly in the financial and energy sectors. Roughly half of the ETF’s holdings are in financial companies like banks and insurance firms, while another large portion is in energy companies. Both sectors are key dividend payers in Canada, but their performance can be heavily influenced by macroeconomic factors such as interest rates and commodity prices. Investors should be aware of this risk when considering the ETF for long-term growth and stability.

5. Liquidity and Regular Rebalancing

VDY also ensures that the companies in its index meet liquidity standards, making it easier for investors to enter and exit positions without large price fluctuations. The ETF is periodically reviewed and rebalanced to reflect the most current market conditions, ensuring that only high-yielding, liquid companies remain in the index. This keeps the portfolio aligned with its objective of providing a solid dividend income stream, while maintaining exposure to Canada’s largest, most stable companies.

6. Ideal for Income Investors

For investors seeking regular income, VDY stands out due to its focus on companies that have the capacity to pay dividends over the long term. The ETF is particularly attractive for those looking for exposure to high-yielding Canadian stocks without having to select individual companies themselves. It simplifies the process by offering a basket of dividend-paying companies, thereby spreading out the risk while ensuring a steady flow of dividend income.

Is VDY a good investment?

VDY stock vs XDV and XEI

In this section, we will compare VDY with Both XDV – Ishares Canadian Select Div Index and XEI – Ishares S&P TSX Comp High Div Index. See tables below:

Table 1: AUM and MER

Looking at the management fees, VDY is attractive. The MER is only 0.21% in comparison with XDV, which stands at 0.55%.

Table 2:  VDY Stock – Performance comparison and analysis

Updated every 15 minutes – VDY Stock

Analysis:

VDY stands out for its long-term performance, leading both the 3-year and 5-year average returns compared to XDV and XEI. This makes it particularly attractive for investors focused on sustained growth over time, especially if looking for dividend-paying Canadian stocks.

Sector Allocation and Diversification:

It’s important to note that both VDY and XEI have a significant portion of their portfolios concentrated in the banking sector, a common characteristic of high-dividend ETFs in Canada. While financials are strong dividend payers, this concentration can expose your portfolio to sector-specific risks. Investors should keep this in mind and ensure that their overall portfolio is diversified across various industries to mitigate these risks.

Holdings and Volatility:

• XDV holds 30 high-dividend stocks, whereas VDY includes 39.
• In terms of volatility, both XDV and VDY show a similar Beta of 0.9, indicating that they are slightly less volatile than the broader market.

Conclusion:

While both ETFs offer stable dividend income with comparable risk (Beta), VDY consistently outperforms XDV in terms of long-term returns. However, it’s important not to solely focus on past performance. Factors like sector concentration, your overall portfolio strategy, and income objectives should guide the final decision.

Table 3: Dividend schedule and Beta

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How much is the dividend for VDY?

VDY pays dividends on a monthly basis. Please refer the last column of the table below for the amount of dividend distribution.

What Holdings are in VDY?

Best Canadian Bank Dividend Stocks

VDY Sectors allocation

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