The recent Australian federal budget changes appear to make superannuation the best way for Australians to invest for passive income.
I think that's true because superannuation has a lower tax rate compared to many individuals, trusts and companies. With the set-and-forget nature of superannuation, it makes it very easy to invest for the long-term with the retirement system.
Receiving passive income is a very simple and laid-back strategy when it comes to investing in shares. However, when considering the passive income return, we need to remember that the focus should be on the net income, meaning the after-tax return. Full-time working Aussies that invest for passive income in their own name could lose a third of those payments to tax each year, which isn't ideal.
In my view, investing in superannuation is more appealing because of its lower tax rate in the accumulation phase compared to the typical individual's tax rate for a full-time earner. It's possible that the tax rate could be 0% in retirement.
It should be said that every household's tax situation is different, so let's look at the targeted income level of $11,000 per month, without talking about tax for the rest of this article.
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How much is needed in superannuation for $11,000 of monthly passive income?
Receiving $11,000 in dividends each month equates to an annual goal of $132,000 per year. I bet lots of Australians would like to receive that amount of dividends each year without needing to do ongoing work to get the money flowing into the bank account.
I'd suggest Australian investors need to consider what types of investments they want to own and the yield that comes with it. In my view, ASX shares are the best pick for passive income, partially due to the likely franking credits that come attached to dividends from companies.
A portfolio with a dividend yield of 6% could 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 approximately $2.2 million in size, it would generate approximately $132,000 of annual dividends with a 6% dividend yield. If a portfolio had a 3% dividend yield, it would need to be around $4.4 million in size to generate the same amount.
Of course, other dividend yields would require different-sized portfolios to achieve targeted levels of passive income. For example, a 5% dividend yield would require a portfolio size of $2.6 million to reach $132,000 annually.
The types of ASX dividend shares I'd want to buy
If an Australian superannuation investor wants to unlock mid-to-higher dividend yields, then they're in luck. The ASX share market gives access to great companies with franking credits, real estate investment trusts (REITs) with compelling payouts and attractive valuations, as well as listed investment companies (LICs) with a pleasing track record of rising dividends.
Two of the businesses with a great track record of growing their payouts include investment house Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) and Kmart and Bunnings owner Wesfarmers Ltd (ASX: WES). I believe these two businesses will be able to compound their payouts.
I'm attracted to some mid-yielding names like Rural Funds Group (ASX: RFF), Centuria Industrial REIT (ASX: CIP), Australian Foundation Investment Co Ltd (ASX: AFI), Telstra Group Ltd (ASX: TLS) and WCM Quality Global Growth Fund (ASX: WCMQ).
Finally, for a higher dividend yield, I'd look at names like MFF Capital Investments Ltd (ASX: MFF), WCM Global Ltd (ASX: WQG), Future Generation Global Ltd (ASX: FGG) and Future Generation Australia Ltd (ASX: FGX).
