Superannuation has become a highly effective tool for investors to generate returns at a lower tax rate. It can be a very effective way for investors wanting passive income.
Pleasingly, superannuation has a lower tax rate than many companies, trusts and individuals. The way superannuation works also means it's very easy to invest for the long term.
In my view, receiving passive income is one of the top benefits of owning shares. It's really rewarding to receive passive income from owning ASX shares.
Getting paid money each year for no ongoing effort seems like a compelling arrangement to me.
One of the best benefits about superannuation is that Australians lose less of their passive income return to tax. I think it's important to remember that it's the after-tax passive income that investors can use.
If an Australian working full-time receives passive income in their name, they could lose a third (or more) of that dividend income to income tax, which makes the passive income return less appealing.
Following proposed taxation changes earlier this year, superannuation could be the best place to invest for passive income because of the lower tax rate in the accumulation phase of wealth building, compared to an individual owning income-paying assets as a full-time earner.
In retirement, an Australian's superannuation tax rate could be as low as 0%. We can't get a lower tax rate than that!
Of course, every household's taxation situation may be different, so I'll just look at targeting a particular dividend goal and ignore tax rates for the rest of the article.
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How much is needed in superannuation for $70,000 of annual passive income?
Receiving $70,000 of annual passive income sounds great to me. I'd like to get there one day, though I'm a long way off the goal.
Australian superannuation investors should think about what sort of investments they want to own and the scale of the dividend yield of that asset.
In my opinion, ASX shares are the best choice for passive income, partly because of the great franking credits that are attached to dividends.
Based on all of the above, we can see that the required superannuation balance to earn $70,000 each year depends on the dividend yield of the portfolio.
For example, if a portfolio has a 5% dividend yield, it'd require $1.4 million, a 4% dividend yield would require $1.75 million and a 7% dividend yield would require a $1 million portfolio.
It depends on which ASX shares investors choose.
The types of ASX dividend shares I'd buy
There are lots of appealing ideas on the ASX that can deliver good dividend yields.
For example, we can choose wonderful operating companies, fantastic listed investment companies (LICs) and impressive yet discounted real estate investment trusts (REITs).
Some of the names I'd consider with low-to-medium dividend yields but with good growth and/or payout stability include L1 Long Short Fund Ltd (ASX: LSF), Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Wesfarmers Ltd (ASX: WES), Lovisa Holdings Ltd (ASX: LOV) and APA Group (ASX: APA).
Some of the businesses with larger dividend yields include Future Generation Australia Ltd (ASX: FGX), Hearts and Minds Investments Ltd (ASX: HM1), Dexus Industria REIT (ASX: DXI), Telstra Group Ltd (ASX: TLS), Charter Hall Long WALE REIT (ASX: CLW), Rural Funds Group (ASX: RFF), Centuria Industrial REIT (ASX: CIP), MFF Capital Investments Ltd (ASX: MFF) and WCM Global Growth Ltd (ASX: WQG).
