After the recent Federal budget changes to trusts, and negative gearing and capital gains for individuals, superannuation may be the best way to invest for full-time working Australians who want passive income.
Superannuation has a low tax rate compared to individuals, trusts and companies. Plus, it's easy to invest for the long-term through the investment vehicle.
It's important to remember that the net income is an after-tax figure. An Australian working full-time could lose approximately a third of their passive income return to tax.
Therefore, investing in superannuation is a much more appealing prospect compared to other options. Superannuation has a lower tax rate in the accumulation phase than the standard individual tax rates for a full-time earner. In retirement, the tax rate could be 0%.
However, every Australian's tax position is different, so we're going to look at targeting a particular income level without mentioning tax any further.
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How much is needed in superannuation for $7,500 of monthly passive income
Receiving $7,500 in dividends per month translates into $90,000 per year. I reckon many Australians would love to receive that level of dividends each year without having to do any ongoing work for it.
Australian investors need to decide what investments they want to own and the dividend yield that comes with that.
A portfolio with a dividend yield of 7% can be half the size of a portfolio with a dividend yield of 3.5% and earn the same level of passive income.
For example, if a portfolio were $1.3 million in size, it would generate $91,000 of annual passive income with a 7% dividend yield. If a portfolio had a dividend yield of 3.5%, the portfolio would need to be $2.6 million in size to generate the same level of cash payments.
To generate almost exactly $90,000 of annual passive income with a 7% dividend yield, an investor would need a portfolio size of $1.286 million.
A 5% dividend yield would require a portfolio size of $1.8 million to make $90,000 annually.
A 4% dividend yield would require a portfolio size of $2.25 million.
The types of ASX dividend shares I'd want to buy
If a superannuation investor is targeting mid-to-higher dividend yields, then I'd look at reliable and discounted real estate investment trusts (REITs), growing companies with a generous dividend payout ratio and listed investment companies (LICs) with a good track record of dividends.
Appealing businesses with a dividend yield of around 5% to 6%, in my view, include WCM Quality Global Growth Fund (ASX: WCMQ), Telstra Group Ltd (ASX: TLS), Rural Funds Group (ASX: RFF), Centuria Industrial REIT (ASX: CIP), Australian Foundation Investment Co Ltd (ASX: AFI) and Argo Investments Ltd (ASX: ARG).
Businesses with a higher dividend yield include Future Generation Global Ltd (ASX: FGG), Future Generation Australia Ltd (ASX: FGX), Hearts and Minds Investments Ltd (ASX: HM1), WCM Global Growth Ltd (ASX: WQG), WAM Leaders Ltd (ASX: WLE), WAM Microcap Ltd (ASX: WMI) and Charter Hall Long WALE REIT (ASX: CLW).
