How much is needed in superannuation to target an $8,000 monthly passive income?

Last month’s Australian federal budget changes seem to make superannuation the best financial tool for Australians to invest for passive income.

Superannuation has a lower tax rate compared to many individuals, trusts and companies. Pleasingly, it’s easy to invest for the long-term through the superannuation structure.

Receiving passive income is a very pleasing element of investing in shares. When thinking about the benefits of passive income, we need to remember that with investment income, we need to focus on the net income, meaning the after-tax figure. Full-time working Aussies that invest for passive income in their own name could lose a third of those payments to tax each year, which isn’t ideal.

So, in my view, superannuation is more appealing because of its lower tax rate in the accumulation phase compared to the typical individual’s tax rate for a full-time earner. In retirement, the tax rate could be 0%.

Of course, every household’s tax situation is different, so let’s look at the desired income level, without mentioning tax for the rest of the article.

How much is needed in superannuation for $8,000 of monthly passive income?

Receiving $8,000 in dividends each month equates to an annual goal of $96,000 per year. I’m sure lots of Australians would love to receive that amount of dividends each year without needing to do ongoing work for it.

Aussie investors need to think about what kind of investments they want to own and the yield that’s attached. I believe that ASX shares are the best choice for passive income, partly because of the likely franking credits that are attached to dividends from companies.

A portfolio with a dividend yield of 7% could be half the size of a portfolio with a dividend yield of 3.5% and generate the same level of dividend income.

For example, if a portfolio were approximately $1.37 million in size, it would generate approximately $96,000 of annual dividends with a 7% dividend yield. If a portfolio had a 3.5% dividend yield, it would need to be close to $2.74 million in size to generate the same amount.

Of course, other dividend yields would require different-sized portfolios.

A 5% dividend yield would require a portfolio size of $1.92 million.  

The types of ASX dividend shares I’d want to buy

If an Australian superannuation investor wants to unlock mid-to-higher dividend yields, I’d consider excellent companies with franking credits, attractively priced real estate investment trusts (REITs) with resilient payouts, as well as listed investment companies (LICs) with a good history of growing dividends.

Some of the excellent lower-yielding companies I’d consider are Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Wesfarmers Ltd (ASX: WES) and Lovisa Holdings Ltd (ASX: LOV). I’m expecting excellent compounding payout growth from these names.

A few of the mid-range yielding ASX dividend stocks I’d look at are WCM Quality Global Growth Fund (ASX: WCMQ), Centuria Industrial REIT (ASX: CIP), Dexus Industria REIT (ASX: DXI) and Telstra Group Ltd (ASX: TLS).

I think some of the most attractive names with a higher yield include MFF Capital Investments Ltd (ASX: MFF), WCM Global Growth Ltd (ASX: WQG), Future Generation Global Ltd (ASX: FGG) and Hearts and Minds Investments Ltd (ASX: HM1).

The post How much is needed in superannuation to target an $8,000 monthly passive income? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has positions in Future Generation Global, Hearts And Minds Investments, Mff Capital Investments, Washington H. Soul Pattinson and Company Limited, Wcm Global Growth, and Wcm Quality Global Growth Fund. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Lovisa, Washington H. Soul Pattinson and Company Limited, and Wesfarmers. The Motley Fool Australia has positions in and has recommended Telstra Group and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Lovisa, Mff Capital Investments, and Wesfarmers. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.