The cool thing about dividend investing is that when it’s done right, it’s pretty boring—and nothing is as boring as watching a tree grow. But when you combine the boring nature of compounding dividends over time with a growing forest, something exciting happens. You get some profits and cash flows as big as a mighty oak tree.
Those juicy cash flows could have been the impetus behind timber giant Weyerhaeuser’s (WY ) decision to buy rival Plum Creek (PCL) for a whopping $8.44 billion and create the nation’s largest landowner. That’s some serious cash to be spending in order to own acres and acres of pine trees. But it just goes to show how valuable timber as an asset class can be. For WY could be worth as much as $800 million annually in synergies and cash flows.
For investors, they may just want to take a walk in the woods.
Dividends From Pines, Maples and Oaks
Combined, the new WY/PCL combo will own more than 13 million acres of timberland and be worth around $23 billion at today’s prices. On that acreage are millions and millions of trees that could be more valuable than gold in the future.
The secret is in how timber functions as a commodity.
When lumber prices are low, companies can withhold harvesting logs. When prices rise, they not only profit on the higher log price, but they make more money per tree since the tree has grown. On average, a forest grows by 7% each year. It’s the only natural resource that does that—corn will spoil if not consumed or sold, and while you can wait to mine coal for better prices, the amount in the ground doesn’t get any larger.
This unique ability" http://www.ncreif.org/timberland-returns.aspx helps to explain how prices for timberland, according to the National Council of Real Estate Investment Fiduciaries (NCREIF) Timberland Index, have risen annually by nearly 13% per year since 1987. At the same time, harvesting lumber from this land produces some pretty “bond-like” returns of 2% to 4% a year
Now, uber-wealthy investors, pension plans, endowments and other institutional investors usually participate in timber’s “bond-like” cash flows via timber management organizations (TMO), which privately own swaths of land and hire someone with a chainsaw to come harvest logs. The problem is the minimum investments are very large and usually there are decades-long investment lock-up times.
The key for us regular Joes not named Rockefeller is that there is a poor man’s TMO. Many timberland owners are structured as real estate investment trusts (REITs). Just like an apartment or office building owner, timber REITs collect “rent” by cutting down trees and selling the logs. And as REITs, the timber stocks are required to kick-out those cash flows as dividends to their investors.
Betting On Boring
It’s no secret that the compounding of dividends over the long term is the key to building wealth. Timber is perhaps THE long term asset class. So when you combine the two via a REIT—which by design is required to kick-out 90% of cash flows back to investors as dividends—you have a recipe for great returns over long stretches of time.
Accessing those returns is quite easy.
If the WY/PCL deal goes through—and it should as Plum Creek shareholders are getting a good deal for their shares—there will be only four timber REITs left. The other three, Rayonier (RYN ), Potlatch (PCH ) and CatchMark (CTT ), albeit smaller than Weyerhaeuser and Plum Creek, still own millions of acres of timberland and function in the same way. They could be big long term buys as a way to profit from the boring asset class. All in all, the sector offers a dividend yield averaging 4.3%.
Secondly, there are two exchange traded funds (ETFs)—the iShares Global Timber & Forestry (WOOD ) and Guggenheim Timber ETF (CUT ). Cute tickers aside, the funds can be used to provide some exposure; however, they do own non-timberland-related forest product stocks. They aren’t pure proxies and the dividend yields from the ETFs are inconsistent.
Paying A Pretty Penny For Boring
Weyerhaeuser was willing to pay a pretty penny for boring and unexciting trees. But this just goes to show you how beautiful boring can be—especially if you are a dividend investor. Playing timberland with the various timber REITs and just letting their dividends compound could be one of the best producers of wealth over the next decades. Whether you buy one, or them all, every investor looking to generate great total returns should turn their attention to the boring timber REIT.
Disclosure: Author is Long WY, RYN, PCL and PCH.
Image courtesy of Poulsen Photo at FreeDigitalPhotos.net
