You know the secret to racking-up steady long-term returns? Go for a walk in the woods. Those trees could be one of the best ways to steadily build wealth over the long term.
Owning forestland and timber stocks has managed to produce stellar long-term returns, while basically telling volatility to “take a hike in the woods.” A combination of factors make timber the ultimate option in long-term asset classes. Add in the fact that many timber companies are structured as high-dividend-paying real estate investment trusts (REITs), and you have a recipe for success in the years and, perhaps, decades ahead.
And with lumber prices recently rising, investors today are able to cash in on the next wave of the timber cycle.
Timber Stocks: The Boring but Beautiful Asset Class
Watching trees grow is about as boring as well, watching trees grow. Timber, as an asset class, isn’t exactly cocktail party fare. Yet, boring is the true way to increase a portfolio over decades. The secret to the asset class’ strong and stable nature comes from the trees themselves.
When lumber prices are low, timber companies can withhold harvesting logs and let the trees grow. When prices rise, they not only profit on the higher log price, but they make more money per tree since it is now larger. Very few commodities — if, any — can say that, and it’s the reason why timber has managed to outperform a variety of other asset classes and alternatives without really breaking a sweat.
According to indexing firm MSCI, timber sales account for clockwork-like returns of around 2%-4% per year. That’s pretty steady bond like returns. Returns that lead to some serious cash flows and dividend potential.
While pension funds, endowments and other institutional investors use timber management organizations (TMOs) or directly invest in timberland, many publicly traded timber stocks are set-up as REITs. In exchange for various tax-benefits, REITs are required to pay-out the bulk of their earnings as distributions to investors. The timber REITs — who have sold off many of their non-timberland holdings over the years — offer pure ways to steadily turn timber sales into dividend checks and income.
Cash flows aside, timber does add some juice and benefits to a portfolio as well.
Rising interest in timberland as well as other uses for forests — for example, fees generated for recreation usage — have helped the asset class rack-up some serious gains over the decades. The main index of timberland prices — the National Council of Real Estate Investment Fiduciaries (NCREIF) Timberland Index — has managed to produce an average annual return of 12.32% since 1987.
That strong return has managed to best both stocks and bonds over that time period. Meanwhile, that market-beating return has managed to come with lower overall volatility and a hefty dose of inflation protection, and now could be the best time to add the asset class to a portfolio.
Recent bullish housing data has helped pull lumber prices up from a three-year low reached back in mid-May. With analysts expecting lumber to rise by 15%-20% by the end of the year, the bottom may be in for many timber stocks.
Given the many positive attributes of adding timber stocks to a portfolio, investors with long-term timelines should consider it. Here are two of the best timber plays:
Owning more than 6 million acres of timberland in the U.S. and managing an additional 14 million acres under long-term licenses in Canada, Weyerhaeuser (WY) is one of the largest timber stocks in the world and a cash flow king.
And since selling off its homebuilding division and becoming a timber REIT, WY has become an even bigger winner.
Since the start of 2010, WY has increased its quarterly dividend from 5 cents per share to 29 cents per share, a whopping 480% increase in just five years. And given its strong cash flows and available funds from operations, WY should continue increasing that payout into the future. Currently, Weyerhaeuser yields 3.7%.
As for buying that growing 3.7% yield, now could be the time. A strong dollar has crimped earnings at WY’s performance fiber division, which is very dependent on international sales. So, that depressed WY stock. Weyerhaeuser can be had near its 52-week low and a forward price-to-earnings ratio of 18.
For investors looking for beaten-down value, timber stock Rayonier (RYN) could be the answer. After spinning off its specialty fiber division as Rayonier Advanced Materials (RYAM), RYN was posed to be a “pure-play” timberland owner. The unfortunate thing is that Rayonier incorrectly accounted its timberland inventory. The mistake resulted in a dividend cut and massive stock slide at the end of 2014.
Since that time, RYN has kind of floundered and continued to drop more.
But many of qualities of Rayonier still exist. RYN stock is still one of the largest owners of timberland — 2.6 million acres. And cash flows remain robust, which is a good thing as RYN management has started to focus more on cash flow heavy timber properties rather using land sales to juice returns.
All in all, that makes Rayonier a more stable dividend payer over the longer term. Currently, RYN stock yields 3.92%.
As of this writing, Aaron Levitt was long RYN and WY.