I'm sure most people reading this want to increase their wealth and grow their annual passive income, whether that's inside or outside superannuation.
How we structure our investments can make a big difference to how much tax we pay. We can invest in our own name, in a company, a trust, superannuation and so on.
If investors want dividend income, then how they invest can make a big difference in how much income tax is paid.
If an Australian has no income other than dividends in their own name, they can earn $18,200 tax-free. However, a full-time working Australian may lose a fair portion of their dividend income to tax because they're in a higher tax bracket.
Superannuation is taxed at a lower rate, making it a particularly appealing structure for full-time workers.
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Why I think ASX shares are the right pick for passive income
Quality ASX shares can offer a pleasing mix of a strong dividend yield, a rising payout over time, and, hopefully, capital growth.
With strong earnings, ASX shares can deliver a generous dividend payout ratio. Australian companies can provide Australian tax residents with the added benefit of franking credits, a refund of the company tax paid to ensure the dividend is taxed at the investor's relevant tax rate.
There are many dividend-paying options on the ASX, such as blue-chip companies Wesfarmers Ltd (ASX: WES) and Telstra Group Ltd (ASX: TLS).
There are real estate investment trusts (REITs) such as Centuria Industrial REIT (ASX: CIP), Rural Funds Group (ASX: RFF) and Charter Hall Long WALE REIT (ASX: CLW). REITs don't generally generate franking credits because they are trusts not companies.
Investors can also choose investment companies such as Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Australian United Investment Company Ltd (ASX: AUI), Argo Investments Ltd (ASX: ARG), L1 Capital Long Short Fund (ASX: LSF) and MFF Capital Investments Ltd (ASX: MFF).
Depending on the superannuation fund, investors may be able to choose specific ASX share investments for annual passive income. SMSFs obviously have a lot of investment flexibility.
How superannuation can generate $95,000 of annual passive income
An investor would need a very sizeable superannuation balance to generate that much income.
The required portfolio size depends on the portfolio's dividend yield.
For example, if the dividend yield was 10% then the portfolio would need to be $950,000. But, I don't think it'd be realistic or sustainable to have a portfolio yield that high.
A 1% yield would need a $9.5 million portfolio. But, if we're aiming for dividends, that yield would be too low, in my view.
I'd aim for the portfolio yield to be somewhere in the middle, at say 4% to 6% including franking credits. At that level, an investor is looking at a portfolio size of between $1.58 million to $2.375 million.
It's a sizeable level required, but with regular investing and compounding, investors can reach those balances, or close to it.
