Superannuation has proven to be a highly effective tool for investors to generate returns at a lower tax rate. It can be very effective for investors wanting passive income.

Pleasingly, superannuation has a lower tax rate than many individuals, trusts and companies. The nature of the superannuation structure means it’s very easy to invest for the long term.

In my eyes, receiving passive income is one of the best parts of owning shares. It’s really rewarding to receive passive income by owning ASX shares. Getting paid money into our bank accounts every year for no ongoing effort sounds good to me.

One of the major benefits of superannuation is that Australians lose less of the passive income return to tax. It’s important to keep in mind that it’s the after-tax passive income that investors should focus on.

If a full-time working Australian receives passive income in their name, they could lose a third (or more) of that dividend income to income tax, therefore making the passive income return less appealing.

These days, superannuation may well be the most appealing place to invest for passive income because of that lower tax rate in the accumulation phase of life, compared to the tax rate of an individual’s tax rate as a full-time earner.

In retirement, an Australian’s superannuation tax rate could be as low as 0%. An investor can’t find a lower tax rate than that.

Of course, every household’s taxation situation may be different, so I’ll just talk about targeting a particular dividend goal and leave tax rates behind for the rest of the article.

How much is needed in superannuation for $70,000 of annual passive income?

Receiving $70,000 in dividends each year sounds really good to me. While I have a long way to go to reach that level of cash flow, it’s something i’d love to achieve.

Australian superannuation investors need to think about what sort of investments they want to own and the size of the dividend yield that comes with that.

In my view, ASX shares are the best choice for passive income, partly due to the bonus of the attached franking credits.

Therefore, the required superannuation balance to earn $60,000 annually will depend on the dividend yield of the portfolio.

For example, a portfolio with a 5% dividend would require $1.4 million, a 4% dividend yield would require a $1.75 million portfolio and a 7% dividend would require a $1 million portfolio.

It really depends on which ASX shares investors choose.

The types of ASX dividend shares I’d buy

There are plenty of compelling ideas on the ASX that can deliver good dividend yields.

For example, there are discounted real estate investment trusts (REITs), excellent listed investment companies (LICs) and great operating companies.

Some of the names I’d look at with low-to-medium dividend yields but good growth and/or stability include Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Wesfarmers Ltd (ASX: WES), Lovisa Holdings Ltd (ASX: LOV), Centuria Industrial REIT (ASX: CIP), L1 Long Short Fund Ltd (ASX: LSF) and APA Group (ASX: APA).

Investments with a higher dividend yield include names like  MFF Capital Investments Ltd (ASX: MFF), WCM Global Growth Ltd (ASX: WQG), Future Generation Global Ltd (ASX: FGG), Dexus Industria REIT (ASX: DXI), Telstra Group Ltd (ASX: TLS) and Charter Hall Long WALE REIT (ASX: CLW).

The post How much is needed in superannuation to target a $70,000 annual passive income? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has positions in Future Generation Global, L1 Long Short Fund, Mff Capital Investments, Washington H. Soul Pattinson and Company Limited, and Wcm Global Growth. 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 Apa Group, Mff Capital Investments, Telstra Group, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Lovisa and Wesfarmers. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Twelve months ago, the ASX financials sector was the talk of the market.

The S&P/ASX 200 Financials Index (ASX: XFJ) rose 24.3% in FY25, making it the best-performing sector of all eleven ASX 200 market sectors.

Commonwealth Bank of Australia (ASX: CBA) was the standout, rising 45% to close FY25 at $185, just days after hitting a record high of $192.

Investors who held the banks through FY25 were handsomely rewarded.

FY26, however, was a completely different story.

What the numbers show for FY26

CBA shares fell approximately 11% over FY26, reversing a significant portion of the 45% gain that made the sector’s FY25 performance look so impressive.

National Australia Bank Ltd (ASX: NAB) shed approximately 4% over the full year. Westpac Banking Corp (ASX: WBC) fell approximately 11%.

The S&P/ASX 200 Financials Index moved into negative territory, making it one of the weaker sector performers in a year when the broader market managed only a 3% gain.

Why did this happen? Three specific forces converged to drive the banks from sector darling to under-performer in the space of twelve months.

Force one: three rate hikes the market did not expect

The RBA delivered three consecutive cash rate increases in February, March, and May 2026. This took the official rate to 4.35%, its highest level since late 2011.

Higher rates are a double-edged sword for banks.

On one side, rising rates expand net interest margins as lending rates reprice faster than deposit costs.

On the other, they increase mortgage stress across the banks’ enormous home loan books, raise the risk of credit losses, and weaken demand for new lending.

In FY26, the second side of that equation dominated.

Force two: the valuation problem

Coming into FY26, CBA was trading at approximately 26 times forward earnings. This was one of the highest valuations in its history and a premium that left virtually no room for earnings to disappoint.

When CBA’s Q3 FY2026 trading update showed flat operating income and a 1% decline in unaudited cash NPAT. These results came in below the elevated expectations the market had built in, the shares fell sharply.

A premium valuation stock that misses elevated expectations does not merely stop going up. It falls hard, and it falls fast.

NAB and Westpac faced similar dynamics, with both trading at multiples that reflected optimism rather than the more cautious credit environment that was actually developing.

Force three: the policy shift that hit the mortgage book

The federal budget’s decision to restrict negative gearing for established residential properties directly hit the banks’ most profitable mortgage customers.

Jarden analyst Matthew Wilson estimated the changes could cut housing credit growth by as much as 25%, naming CBA as the most exposed given its investor loan concentration.

CBA’s own economists confirmed the policy would reduce dwelling prices by approximately 3% relative to what they otherwise would have been. They forecast dwelling price growth of just 3% to December 2026, down from a prior forecast of 5%.

For a sector whose earnings are deeply tied to the health of the Australian property market, that represents a direct headwind on both credit quality and lending volume simultaneously.

Where CBA, NAB, and Westpac stand heading into FY27

The picture heading into FY27 for ASX financials is nuanced rather than uniformly bearish.

CBA remains the most expensive of the three at approximately 25 times forward earnings, leaving it the most exposed to any further earnings disappointment.

NAB is cheaper at approximately 15 times forward earnings but faces its own credit quality headwinds given its business banking concentration.

Michael Gable from Fairmont Equities retained a sell rating on NAB shares, saying:

Despite a significant share price fall, NAB valuations aren’t cheap, leaving the stock exposed to downside risk.

Westpac, with approximately 69% of its loan book in residential mortgages, is the most directly exposed to any further deterioration in the housing market.

The RBA’s decision to hold at 4.35% in June and signal that further hikes remain possible but are not certain is the most important variable for all three heading into FY27.

A rate-cutting cycle, when it eventually arrives, may change the sector’s fortunes.

Until then, the forces that drove FY26’s underperformance have not fully resolved.

Foolish takeaway for ASX financials

The ASX financials sector went from the best performer in FY25 to an under-performer in FY26 because three specific forces hit simultaneously: unexpected rate hikes, stretched valuations, and a direct policy attack on the sector’s most profitable customer segment.

None of those forces have completely reversed.

FY27 will test whether the rate cycle has peaked and whether Australian credit quality holds up.

The answer to both questions will determine whether the sector can recover.

The post ASX financials went from the best sector in FY25 to negative growth in FY26. Here’s what changed appeared first on The Motley Fool Australia.

More reading

• Owned CBA shares for 10 years? Here’s how much money you’ve made
• 2 world-class ASX 200 shares I want in my portfolio
• Better buy? NAB vs Westpac shares
• How much do I need in superannuation to receive $5,500 per month in passive income?
• A leading analyst is forecasting growing headwinds for NAB shares. Should investors be worried?

Motley Fool contributor Mark Verhoeven has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

As Aussies submit their end-of-financial-year (EOFY) tax returns, some may be looking to invest their returns to generate returns.

EOFY is often when investors revisit existing positions and look for opportunities the market may have overlooked.

A new report from VanEck has highlighted a sector that is largely being overlooked – international small-caps.

International small caps remain attractively valued despite improving earnings and manufacturing activity, making them an overlooked EOFY investing opportunity.

Trading below historical averages

According to the report, despite signs that economic conditions are proving more resilient than expected, international small caps remain one of the few areas of global equity markets trading below historical valuation averages.

The recent Federal Reserve meeting reinforced this view, suggesting the backdrop may not be as weak as many investors had anticipated.

For investors reviewing portfolios ahead of EOFY, that disconnect between improving fundamentals and cautious valuations may be worth paying attention to.

Economy remains resilient

VanEck argues that while the US Federal Reserve’s more hawkish stance has led markets to expect interest rates to remain higher for longer, the broader economic backdrop is becoming increasingly supportive for international small-cap companies.

A resilient labour market, improving hiring intentions, and a return to expansion in US manufacturing activity suggest a reflationary environment that has historically supported stronger earnings growth and outperformance among quality small caps.

As economic activity and corporate earnings improve, VanEck believes current small-cap valuations may present an attractive investment opportunity.

While the macro environment may be supportive, the most compelling reason for investing in this space may lie in where valuations are at.

International small caps are one of the few major equity asset classes still trading below their long-term average valuation levels.

Earnings beginning to respond

According to VanEck, one of the more encouraging signs for small-cap investors is that earnings expectations are starting to improve.

Forward earnings forecasts for global small companies have begun accelerating after an extended period of weakness.

Historically, this has been an important signal, with improvements in earnings expectations often accompanied by stronger small-cap performance.

How to gain exposure to quality small-caps

For those looking to turn their tax return into a growth opportunity, one ASX ETF to consider is the VanEck Msci International Small Companies Quality ETF (ASX: QSML).

It provides exposure to 150 of the world’s highest quality international small companies, selected using a disciplined framework focused on high return on equity, earnings stability and low financial leverage.

This approach seeks to capture the growth potential of small companies while maintaining a focus on businesses with stronger fundamentals.

 

 

The post Looking to target high upside shares with your tax return? Here’s where VanEck sees opportunity appeared first on The Motley Fool Australia.

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Motley Fool contributor Aaron Bell has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.