Superannuation has proven to be a highly effective tool for investors to generate returns at a lower tax rate. It can be very effective for investors wanting passive income.
Pleasingly, superannuation has a lower tax rate than many individuals, trusts and companies. The nature of the superannuation structure means it's very easy to invest for the long term.
In my eyes, receiving passive income is one of the best parts of owning shares. It's really rewarding to receive passive income by owning ASX shares. Getting paid money into our bank accounts every year for no ongoing effort sounds good to me.
One of the major benefits of superannuation is that Australians lose less of the passive income return to tax. It's important to keep in mind that it's the after-tax passive income that investors should focus on.
If a full-time working Australian receives passive income in their name, they could lose a third (or more) of that dividend income to income tax, therefore making the passive income return less appealing.
These days, superannuation may well be the most appealing place to invest for passive income because of that lower tax rate in the accumulation phase of life, compared to the tax rate of an individual's tax rate as a full-time earner.
In retirement, an Australian's superannuation tax rate could be as low as 0%. An investor can't find a lower tax rate than that.
Of course, every household's taxation situation may be different, so I'll just talk about targeting a particular dividend goal and leave tax rates behind for the rest of the article.
How much is needed in superannuation for $70,000 of annual passive income?
Receiving $70,000 in dividends each year sounds really good to me. While I have a long way to go to reach that level of cash flow, it's something i'd love to achieve.
Australian superannuation investors need to think about what sort of investments they want to own and the size of the dividend yield that comes with that.
In my view, ASX shares are the best choice for passive income, partly due to the bonus of the attached franking credits.
Therefore, the required superannuation balance to earn $60,000 annually will depend on the dividend yield of the portfolio.
For example, a portfolio with a 5% dividend would require $1.4 million, a 4% dividend yield would require a $1.75 million portfolio and a 7% dividend would require a $1 million portfolio.
It really depends on which ASX shares investors choose.
The types of ASX dividend shares I'd buy
There are plenty of compelling ideas on the ASX that can deliver good dividend yields.
For example, there are discounted real estate investment trusts (REITs), excellent listed investment companies (LICs) and great operating companies.
Some of the names I'd look at with low-to-medium dividend yields but good growth and/or stability include Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Wesfarmers Ltd (ASX: WES), Lovisa Holdings Ltd (ASX: LOV), Centuria Industrial REIT (ASX: CIP), L1 Long Short Fund Ltd (ASX: LSF) and APA Group (ASX: APA).
Investments with a higher dividend yield include names like MFF Capital Investments Ltd (ASX: MFF), WCM Global Growth Ltd (ASX: WQG), Future Generation Global Ltd (ASX: FGG), Dexus Industria REIT (ASX: DXI), Telstra Group Ltd (ASX: TLS) and Charter Hall Long WALE REIT (ASX: CLW).
