I couldn't really find a how-to guide on watching videos on VLC while playing WoW so I decided to share this quick How-To guide.
I use an iMac so this is for Mac users:
Open your VLC video and go to Preferences.
Under the Video tab, select Always on Top.
If you don't want the ugly controls to show while you play, go to Interfaces and deselect "Add control to the video window."
Exit out of VLC in order for the changes to take effect.
Play your movie again and voilla! :)
I do this while I have WoW in windowed mode, I'm not sure if that makes a difference but keep it in mind just in case it doesn't work for you.