Superannuation is a very effective tool for investors to generate returns while being taxed at a lower rate. It can be very attractive for Australian investors who want passive income.
Pleasingly, superannuation has a lower tax rate than many individuals, trusts and companies. The nature of the superannuation (and how we access the money) makes it very easy to invest for the long term.
I think receiving passive income is one of the best elements of owning shares. Being paid money into our bank accounts every year for no ongoing effort sounds good to me.
One of the main benefits of superannuation is that less of the passive income return is lost to tax. I believe that the after-tax figure is what Australian investors should focus on.
If a full-time working Australian is paid passive income in their own name, they may lose a third (or more) of that dividend income to tax. That effect can make passive income seem much less appealing.
Superannuation is often the best place to invest for passive income due to the lower tax rate in the accumulation phase of life, compared to a full-time earner's individual tax rate.
However, each person's tax situation is different, so we'll just run through a particular dividend income level and not consider tax rates from now on.
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How much is needed in superannuation for $60,000 of annual passive income?
Being paid $60,000 in dividends each year is appealing to me. I'm nowhere near that goal, but I'd love to reach that level of income one day.
One of the most important decisions to consider is the investments that we want to own and the dividend yield that comes with that.
I think ASX shares are the best choice for passive income, with the attached franking credits being a great bonus.
Reaching $60,000 of annual dividends depends on the size of the dividend yield and the portfolio size.
For example, if an Australian investor had investments with a 6% dividend yield, it would require a $1 million portfolio. If the portfolio had a 3% dividend yield, it would need to be a $2 million portfolio for $60,000 annual income.
As you can see, different investments provide different dividend yields. So, it depends on what Aussies want to choose.
Which ASX dividend shares I'd look at
There are a number of different investment options that investors can choose on the ASX with good dividend yields like real estate investment trusts (REITs), quality operating companies, exchange-traded funds (ETFs) and good listed investment companies (LICs).
I think REITs are very attractive at these valuations amid high interest rates. Some of my leading ideas are Centuria Industrial REIT (ASX: CIP), Dexus Industria REIT (ASX: DXI), Rural Funds Group (ASX: RFF) and Charter Hall Long WALE REIT (ASX: CLW).
Some of the leading operating companies out there include Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Wesfarmers Ltd (ASX: WES), Lovisa Holdings Ltd (ASX: LOV), Telstra Group Ltd (ASX: TLS) and Medibank Private Ltd (ASX: MPL).
There are a few very attractive ETFs that could be useful options for dividend income such as WCM Quality Global Growth Fund (ASX: WCMQ), Vanguard Australian Shares Index ETF (ASX: VAS) and Vanguard Australian Shares High Yield ETF (ASX: VHY).
Some of the LICs that I highly rate for superannuation include MFF Capital Investments Ltd (ASX: MFF), WCM Global Growth Ltd (ASX: WQG), Future Generation Australia Ltd (ASX: FGX), Future Generation Global Ltd (ASX: FGG) and Hearts and Minds Investments Ltd (ASX: HM1).
