Superannuation may well be the best tool for Australian investors to generate returns at a lower tax rate. The Federal budget has changed the economic picture.
Once the tax changes kick in, superannuation may have a lower tax rate than what many individuals, trusts and companies experience.
Another benefit of superannuation is how effective it is for long-term investing. That's because we're typically not going to access that money for a very long time.
I love investing for passive income by owning shares. My money is working in the share market for me year-round and unlocking cash payments to my bank account.
Superannuation is important for this endeavour because of how we lose less of the income return to tax.
If a full-time working Australian receives passive income in their own name, they're likely to lose a third (or more) of the passive income to tax, significantly reducing the appeal of the passive income return.
In my view, superannuation can be the most appealing place to invest because of the better tax rate in the accumulation phase of life, compared to an individual's tax rate if they work full-time.
Impressively, an Australian's superannuation tax rate could be 0% in retirement, which is as good as it gets.
Each Australian's tax rate is different, so I'll focus on targeting a specific income goal from here on, ignoring tax rates.
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How much is needed in superannuation for $80,000 of annual passive income?
Receiving $80,000 in dividends each year sounds good to me, although I'm certainly a long way from that goal. I hope I can reach that target in the future.
I think it's a wise idea for investors to think about what sorts of investments they want to own and the attached dividend yield that comes with that.
There are many different options for investors to consider, but I view ASX shares as the clear leader because of the appealing dividend yields and the fact that company payouts can come with franking credits.
The required portfolio size to reach $80,000 annually depends on the portfolio's dividend yield.
For example, if the portfolio had a 5% dividend yield, it would need to be $1.6 million in size. A 4% dividend yield would require a $2 million portfolio, and a 7% dividend yield would require a $1.15 million portfolio.
Every dividend yield requires a different portfolio size to reach the desired target. As a result, the ASX shares we choose play an essential part in the portfolio's dividend yield.
Which ASX dividend shares I'd buy
Pleasingly, there are a number of ASX shares that can provide good dividend yields to retiree investors (and anyone else).
There are compelling companies, quality real estate investment trusts (REITs) and compelling listed investment companies (LICs).
Some of the businesses I like include Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Telstra Group Ltd (ASX: TLS), Wesfarmers Ltd (ASX: WES), Lovisa Holdings Ltd (ASX: LOV), Propel Funeral Partners Ltd (ASX: PFP) and Universal Store Holdings Ltd (ASX: UNI).
Some of the fund-based investments that pay attractive dividends include MFF Capital Investments Ltd (ASX: MFF), WCM Quality Global Growth Fund (ASX: WCMQ), Future Generation Global Ltd (ASX: FGG) and Future Generation Australia Ltd (ASX: FGX).
In terms of property investments, I think some of the undervalued names with useful organic rental income growth are Rural Funds Group (ASX: RFF), Dexus Industria REIT (ASX: DXI), Centuria Industrial REIT (ASX: CIP) and Charter Hall Long WALE REIT (ASX: CLW).
