With volatility starting to return to the markets and some analysts pointing to the fact that things are beginning to look a bit top heavy, investors may want to dial back their risk profiles and focus on more boring investments. And nothing can be as boring as watching trees grow. Source: Investor Place.com
Timber as an asset class has managed to produce stellar long-term returns … all while laughing in the face of volatility. 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 months and years ahead.
Timber REITs: Boring, But Reliable
As an investment, timber is as boring as it gets. You’re literally watching a tree grow. But that sleepy
demeanor is exactly how the asset class benefits a portfolio. 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.
On average, a forest grows by about 7% each year. That steady nature has made timberland a great investment over the long haul.
A dollar invested in the National Council of Real Estate Investment Fiduciaries (NCREIF) Timberland
Index — the main index of timberland prices — back in 1987 would have turned into more than US$25 today. This compares with just US$15 for the S&P 500 and about US$7 for other forms of commercial real estate.
Meanwhile, that hefty market-beating return comes with a host of other benefits — namely inflation protection and lowered volatility.
On the inflation front, timber has managed to outperform in all manners of inflationary environments. In fact, during the period of high inflation in the US (1973 to 1981) when the CPI averaged 8.5%, the Southern Timberland index — the precursor to the NCREIF — produced a staggering 17.1% return.
All in all, timber is an asset that will preserve and grow capital in the face of rising consumer prices.
And as far as volatility is concerned, boring timber wins again. Its Sharpe ratio beats the S&P 500 by a wide margin (0.92 vs .36). That means timber provides better risk-adjusted performance than the stock benchmark.
But here’s where it gets interesting for investors: Timber can also be a great source of dividends and
income.
Traditionally, pension funds, private equity and endowments have all invested in timberland via timber management organizations (TMOs). Regular investors have generally been shut out of these investments, as initial investments can run into the millions of dollars.
However, several firms have recently organized as real estate investment trusts (REITs). REITs — in exchange for certain tax advantages — are required to kick out 90% of their net income as dividends back to shareholders.
The average timber REIT pays around 4% in dividends.
Many of the major timber REITs have recently begun spinning off or selling their non-timberland and wood products assets. Those moves have made the REITs purely focused on the operation of managing timberlands. They’ve basically become a poor man’s TMO — accessible by buying a single share of stock.
