The method I stated above worked with my lesser quality video files but gave me issues with some higher bit rate ones.
As an experiment I switched the output method to DirectX video output and my issues went away.
There is a small tradeoff though. Windows temporarily disables my desktop theme by reverting it to basic as long as the video is playing. But it sets it back when I close The VLC Player.
On the plus side it seems hardware video acceleration is working well with some types of files. With some 1080p files I think it might be working, but not as efficiently as, say, Media Player Classic Home Cinema.
I'm happy with this.