A 3.5% Yielding Monthly Income ETF Every Canadian Should Review

I’ve said it before and I’ll say it again: total return is all that matters. What you actually keep is the result of price appreciation plus reinvested distributions, after fees and taxes.

That’s why you should be cautious around income ETFs promising double-digit yields. In many cases, they’re either taking on significantly more risk or simply returning your own money back to you through something called return of capital.

This is why I prefer something simpler and more grounded, like the Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX:VDY).

At first glance, it might not look exciting. As of March 31, 2026, it offers a 12-month trailing yield of 3.5%, which doesn’t exactly jump off the page. But again, yield alone doesn’t tell the full story. Total return does. And on that front, this ETF has delivered.

What is VDY?

VDY is a passive ETF that tracks a portfolio of just over 56 Canadian dividend-paying stocks selected for above-average yield. The methodology leans toward companies that not only pay dividends but also trade at reasonable valuations and maintain solid profitability.

On average, the portfolio trades at a price-to-earnings ratio of 15.3 times and a price-to-book ratio of 2.2 times. At the same time, it maintains quality metrics like a 12.8% return on equity and a 6.6% earnings growth rate. That combination of income, value, and profitability is what helps drive long-term results.

Sector-wise, there’s no surprise here. Financials make up over half the portfolio, followed by energy at just over a quarter. That’s simply the reality of the Canadian market. If you want high-yield Canadian stocks, you’re going to get a lot of banks and energy companies. VDY leans into that rather than trying to fight it.

What the numbers say

With a 3.5% yield reinvested before taxes, VDY has delivered a 10-year annualized return of 13.7%. That’s strong on its own, but even more impressive when you compare it to a broad benchmark.

An ETF tracking the S&P/TSX 60 Index over the same period would have returned about 12.5% annualized with dividends reinvested. That difference may not seem huge at first glance, but over time, that gap compounds. That’s what investors refer to as alpha, outperforming the broader market.

It also challenges a common assumption. Dividend ETFs are often seen as slower-growth, income-first investments. But that doesn’t mean they can’t outperform. With the right construction and low costs, they absolutely can. Speaking of costs, VDY charges just 0.22% annually. That’s low enough to avoid eating into returns, especially over long holding periods.

Another point worth highlighting is the distribution profile. VDY pays monthly, which is appealing if you’re looking for regular cash flow. Outside of a Tax-Free Savings Account (TFSA), those distributions are also relatively tax efficient.

A large portion comes from eligible Canadian dividends, which are taxed at a lower rate, with the remainder mostly made up of capital gains and some return of capital. There’s very little exposure to foreign income or fully taxable interest.

Final thoughts

VDY isn’t going to wow you with a double-digit yield. But it doesn’t need to. What it offers instead is a balanced approach: solid income, reasonable valuations, strong underlying businesses, and a track record of delivering competitive total returns.

If your goal is to build long-term wealth while still collecting monthly income, I think this is the kind of ETF that deserves a closer look.

The post A 3.5% Yielding Monthly Income ETF Every Canadian Should Review appeared first on The Motley Fool Canada.

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More reading

• Canadians: Here’s How Much You’ll Likely Need in Your TFSA to Retire
• Want Decades of Passive Income? Buy This ETF and Hold It Forever
• What I’d Buy Instead of Chasing the Magnificent 7
• The 2% Monthly Income ETF That Canadians Should Know About
• 3 Canadian ETFs to Buy and Hold Forever in Your TFSA

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.