Superannuation may be the best place for full-time working Australians to invest for passive income these days.
Dividend income is an excellent aspect of owning ASX shares, but tax is an obvious headwind for the return.
An Australian investor working full-time could lose a third (or more) of their passive income return to tax if they own those shares directly. Recently announced tax changes may also mean that investing in shares through trusts is not as compelling.
Therefore, superannuation could be the best place to invest for passive income and unlock significant cash flow.
Each household's taxation position is different, so I'm not going to mention tax again for the rest of this article.
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How to make $2,000 of monthly passive income
Generating $2,000 per month, which equates to $24,000 per year, may not be enough to live an extravagant lifestyle. But, it could be a significant addition to other forms of income, such as interest or rental profits.
How large a portfolio needs to be to make $24,000 per year largely comes down to what the portfolio's average dividend yield is.
The higher the dividend yield, the smaller the portfolio can be to generate the same level of dividend income.
However, not all dividend yields are necessarily as reliable as others. I'd rather invest in a business that's likely to keep paying dividends than go for a huge dividend yield and see the payments disappear during an economic downturn.
If a portfolio had a dividend yield of 4%, the portfolio would need to be $600,000 in size to generate $24,000 of annual passive income.
A portfolio with a 5% dividend yield would require the portfolio to be $480,000 in size.
If the portfolio had a dividend yield of 6%, it would only need to be $400,000 in size.
What sorts of ASX shares I'd buy
There is a wide range of investment choices available for investors to choose from for passive income in superannuation.
Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) is a very compelling idea for income because its annual dividend has been hiked every year since 1998. However, its grossed-up dividend yield (including franking credits) is currently less than 4%.
In my view, many retiree investors could benefit from considering compelling listed investment companies (LICs) because their portfolios can provide diversification, and dividends can be smoothed for consistent payouts.
I think some of the leading LICs for passive income include WCM Global Growth Ltd (ASX: WQG), MFF Capital Investments Ltd (ASX: MFF), L1 Long Short Fund Ltd (ASX: LSF), WAM Microcap Ltd (ASX: WMI), WAM Leaders Ltd (ASX: WLE), Future Generation Australia Ltd (ASX: FGX) and Future Generation Global Ltd (ASX: FGG).
A few quality real estate investment trusts (REITs) also look significantly undervalued to me, such as Centuria Industrial REIT (ASX: CIP), Dexus Industria REIT (ASX: DXI), Charter Hall Long WALE REIT (ASX: CLW) and Rural Funds Group (ASX: RFF).
The above ASX shares, among others, are top ideas for passive income in superannuation (or outside it).
