There are a variety of ways to invest in ASX shares for passive income. That can be in our own names, through a company, a trust, superannuation, and so on.
Investing for passive income in superannuation makes a lot of sense because of the low tax rate.
It's important to remember that the net income we receive from our investments is what we receive after taxes. An Australian working full-time could end up losing a third of their passive income to tax.
Therefore, investing in superannuation is a much more appealing prospect. Super has a lower tax rate in the accumulation phase compared to normal individual tax rates for a full-time earner. In retirement, the tax rate could be 0%.
But every Australian's tax position is different, so I'm just going to talk about targeting a certain income level, without mentioning tax any further.
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How much is needed in superannuation for $5,000 of monthly passive income?
Receiving $5,000 per month of dividends translates into $60,000 annually. I'm sure most Australians would love to receive that level of dividends each year without having to do any ongoing work for it.
A key question is deciding what sort of investments Australians want to own and the dividend yield that comes with them.
A portfolio with a dividend yield of 6% can be half the size of a portfolio with a dividend yield of 3%.
For example, if a portfolio is $1 million in size with a 6% dividend yield, it would create $60,000 of annual passive income. If a portfolio had a dividend yield of 3%, the portfolio would need to be $2 million in size.
If the portfolio had an average dividend yield of 4%, generating an average of $5,000 in monthly passive income would require a portfolio value of $1.5 million.
The final dividend yield we'll look at is 5%. It would take a portfolio value of $1.2 million to unlock $60,000 of annual dividends.
The sorts of ASX dividend shares I'd look at
There is a wide range of ASX dividend shares available for superannuation investments, some of which offer higher yields and others that have lower yields (but could deliver more growth).
Some of the lower-yielding names that I'd look at, which could provide solid dividend growth in the coming years, are: Wesfarmers Ltd (ASX: WES), Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), and Lovisa Holdings Ltd (ASX: LOV).
A few mid-range yielding ideas that could provide solid total returns at current valuations include WCM Quality Global Growth Fund (ASX: WCMQ), Telstra Group Ltd (ASX: TLS), Australian Foundation Investment Co Ltd (ASX: AFI), and Centuria Industrial REIT (ASX: CIP).
A few of the higher-yielding names that I'm bullish about for the long-term include WCM Global Growth Ltd (ASX: WQG), Charter Hall Long WALE REIT (ASX: CLW), and Hearts and Minds Investments Ltd (ASX: HM1).
