Superannuation is a very effective tool for Australian investors to generate returns at a lower tax rate.
Pleasingly, superannuation has a lower tax rate than many individuals, trusts and companies. The way that superannuation works, and the nature of how we access the money, means it's very easy to invest for the long term inside the super system.
In my view, being paid passive income is one of the best elements of owning shares. Receiving money into our bank account every year for no effort sounds good to me.
How does superannuation play into passive income? Investors lose less of the passive income payments to tax.
Superannuation looks comparatively much more appealing because if a full-time working Aussie receives passive income in their own name, they could lose a third (or more) of that passive income to tax, significantly reducing the effectiveness of the passive income return.
In my opinion, superannuation is therefore a more appealing place to invest because of the lower tax rate in the accumulation phase of life, compared to an individual's tax rate if they're a full-time earner.
In retirement, a person's superannuation tax rate could be 0%. You can't get any better than that.
Of course, each Australia's tax position is different, so I'll just look at targeting a particular income goal from here and ignore the tax rates.
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How much is needed in superannuation for $100,000 of annual passive income?
Receiving $100,000 in dividends each year sounds excellent to me. I'm definitely a long way from that target, but I'd 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 those investments.
I think ASX shares are the best choice for passive income. The attached franking credits are an excellent bonus.
How much is needed to earn $100,000 annually depends on the dividend yield of the portfolio.
For example, a portfolio with a 6% dividend yield would require $1.67 million. Meanwhile, a 4% dividend yield would require a $2.5 million portfolio.
As you can see, different dividend yields require different-sized portfolios to reach the target. Therefore, the numbers are heavily influenced by what ASX shares superannuation investors choose.
The types of ASX dividend shares I'd buy
There are various options on the ASX that can provide good yields to investors. Aussies could choose quality companies, real estate investment trusts (REITs) or listed investment companies (LICs).
Some of my favourite ideas for dividend growth and a solid starting yield include Wesfarmers Ltd (ASX: WES), Telstra Group Ltd (ASX: TLS), Universal Store Holdings Ltd (ASX: UNI), Lovisa Holdings Ltd (ASX: LOV), Medibank Private Ltd (ASX: MPL), Propel Funeral Partners Ltd (ASX: PFP) and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL).
On the commercial property side of things, I like names such as Rural Funds Group (ASX: RFF), Dexus Industria REIT (ASX: DXI), Centuria Industrial REIT (ASX: CIP) and Charter Hall Long WALE REIT (ASX: CLW).
Finally, the LICs that I really like include MFF Capital Investments Ltd (ASX: MFF), L1 Long Short Fund Ltd (ASX: LSF), Future Generation Global Ltd (ASX: FGG) and Future Generation Australia Ltd (ASX: FGX).
These aren't the only attractive ASX dividend shares for superannuation investors, but I think they're an excellent starting point.
