Superannuation is a highly-effective tool for investors to generate returns at a lower tax rate. It can be very useful for investors wanting passive income.
Excitingly, superannuation has a lower tax rate than many individuals, trusts, and companies. The nature of the superannuation structure (and accessing the money) makes it very easy to invest for the long term.
In my view, receiving passive income is one of the most pleasing elements of owning shares. Getting money into our bank accounts every year for no effort sounds enjoyable to me.
But a major benefit of superannuation is that we lose less of the passive income return to tax. It's the after-tax figure that investors should focus on the most.
If a full-time working Aussie receives passive income in their own name, they can lose a third (or more) of that income to tax, significantly reducing the appeal of that passive income return.
Superannuation may be the most appealing place to invest because of the lower tax rate in the accumulation phase of life, compared to an individual's tax rate as a full-time earner. In retirement, a person's superannuation tax rate could be 0%. Can't get any lower than that!
But, each person's tax situation is different, so I'm just going to look at targeting a particular dividend income level and ignore the tax rates from here onwards.
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How much is needed in superannuation for $60,000 of annual passive income?
Receiving $60,000 in dividends each year sounds really good to me. I'm a long way from that, but I would love to receive that much in dividends each year.
Australians need to consider what types of investments they want to own and what size dividend yield comes with that.
I believe ASX shares are a wonderful choice for passive income, with attached franking credits being a great bonus.
The size of a portfolio needed to earn $60,000 annually depends on its dividend yield.
For example, a portfolio with a 6% dividend yield would require $1 million. Meanwhile, a 3% dividend yield would require a $2 million portfolio.
Different dividend yields require different-sized portfolios to reach the target, so it really depends on which ASX shares superannuation investors choose.
The types of ASX dividend shares I'd buy
There are a variety of options on the ASX that can provide good dividend yields, such as real estate investment trusts (REITs), operating companies with resilient earnings and quality listed investment companies (LICs).
Some of the REITs that I'd look at – which seem particularly good value amid the higher interest rate environment – are Centuria Industrial REIT (ASX: CIP), Rural Funds Group (ASX: RFF), Dexus Industria REIT (ASX: DXI) and Charter Hall Long WALE REIT (ASX: CLW).
Operating companies with pleasing dividend yields and records include Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Wesfarmers Ltd (ASX: WES), Telstra Group Ltd (ASX: TLS) and Lovisa Holdings Ltd (ASX: LOV).
In my view, some of the leading LICs to own are MFF Capital Investments Ltd (ASX: MFF), WCM Global Growth Ltd (ASX: WQG), L1 Long Short Fund Ltd (ASX: LSF), Future Generation Australia Ltd (ASX: FGX) and Future Generation Global Ltd (ASX: FGG).
These aren't the only attractive ASX dividend shares for superannuation investors, but I think it's a great starting point.
