The recently announced Federal budget changes may make superannuation the best way for full-time working Australians to invest for passive income.
Superannuation has a low tax rate compared to many individuals, trusts, and companies. On top of that, it's easy to invest for the long-term through the super structure.
One of the most important elements of passive income investing is to understand that the net income we receive from investments is an after-tax figure. Full-time working Aussies investing for passive income in their own name could lose a third of that passive income to tax each year, which is not ideal.
Superannuation is more appealing due to its lower tax rate in the accumulation phase than the usual individual's tax rate for a full-time earner. In retirement, the tax rate could be 0%.
Every household's tax situation is different, so we'll look at a specific income level without mentioning tax from now on.
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How much is needed in superannuation for $6,000 of monthly passive income?
Receiving $6,000 in dividends each month equates to an annual goal of $72,000 per year. Plenty of Australians would probably love receiving that amount of dividends each year without needing to do ongoing work for it.
Australian investors will need to consider what sort of investments they want to own and the yield that comes with that. I believe that ASX shares are the best choice for passive income, partly due to the potential for franking credits.
A portfolio with a dividend yield of 6% can be half the size of a portfolio with a dividend yield of 3% and generate the same level of dividend income.
For example, if a portfolio were $1.2 million in size, it would generate $72,000 of annual passive income with a 6% dividend yield. If a portfolio had a 3% dividend yield, it would need to be $2.4 million in size to generate the same level of annual payments.
Different dividend yields would require different-sized portfolios.
A 5% dividend yield would require a portfolio size of $1.44 million to make $72,000 annually.
A 4% dividend yield would require a portfolio size of $1.8 million.
The types of ASX dividend shares I'd want to buy
If an Australian superannuation investor wants to unlock mid-to-higher dividend yields, I'd consider quality companies with franking credits, good value, and reliable real estate investment trusts (REITs) and listed investment companies (LICs) with compelling passive-income track records.
Some of the ASX dividend shares I'd look at that offer a dividend yield of approximately 5% to 6% include farmland landlord Rural Funds Group (ASX: RFF), industrial property owner Centuria Industrial REIT (ASX: CIP), ASX blue-chip-focused LIC Australian Foundation Investment Co Ltd (ASX: AFI), the global quality share-focused fund WCM Quality Global Growth Fund (ASX: WCMQ), ASX share and global LIC investor L1 Long Short Fund Ltd (ASX: LSF), and Australia's leading telco Telstra Group Ltd (ASX: TLS).
Names with a higher dividend yield that I'd suggest include diversified REIT Charter Hall Long WALE REIT (ASX: CLW) and various LICs, including WAM Leaders Ltd (ASX: WLE), Future Generation Global Ltd (ASX: FGG), Future Generation Australia Ltd (ASX: FGX), and Hearts and Minds Investments Ltd (ASX: HM1).
