Timber Keeps Growing Even in Tough Times

07/24/2020 5:00 am EST

Focus: COMMODITIES

Carl Delfeld

Chief Analyst, Cabot Global Stocks Explorer

Want something that can fortify your portfolio against current volatility and future inflation? One idea you may not have thought of is timber, which has proven over the years to be a terrific investment, suggests Carl Delfeld, editor of Global Stocks Explorer.

Even in tough times, trees grow, compounding in size and value. This is why big institutional investors such as university endowments and pension funds make timber investment allocations in their giant portfolios.

Timber has been one of the most consistent investments over time, and a great hedge against inflation. According to value investor Jeremy Grantham, it’s risen 3% more than inflation for more than 90 years.

Timberland has also beaten the stock market over the long run, and with less volatility. According to research produced by Boston-based GMO, where Grantham is co-founder and chief investment strategist, timber has risen steadily in price for 200 years and has returned an average of 6.5% a year during the last century. 

One reason for timber’s steady growth is that timber prices tend to follow population and economic growth. Emerging market nations such as China and South Korea are key drivers of growing demand for lumber products.

The returns on timber also hold up well in bad economies and bear markets. During the Great Depression, timber gained 233% while the price of stocks fell more than 70%.

A unique characteristic of timberland compared to other agricultural commodities is that timber can be grown and then “stored on the stump.” This gives owners the flexibility of harvesting trees when timber prices are up, and delaying harvests when prices are down.

Timber is a great shock absorber for your portfolio: It has a very low correlation with most asset classes, meaning it zigs when other asset classes zag. During one of the worst-ever bear markets in stocks from the late 1960s until about 1980, timber never had a losing year.

Lastly, it is environmentally sustainable since we have certainly come a long way from the cut and burn practices used by the timber barons of the 19th century.  Forestry, in America anyway, is now a sophisticated, sustainable and scientific business. Let’s look at two trades for individual investors looking to diversify into timber.

For the most bang for your buck, I suggest you go with real estate investment trusts that directly own and manage timberland. Timber REITs must pay 90% of funds from operations to shareholders in the form of dividends.

Consider Rayonier (RYN), a leading timberland REIT that delivered revenue growth of 35% in its last quarter and boasts a 4.4% current dividend yield. The company has assets located in some of the most productive softwood timber growing regions in the United States and New Zealand.

Rayonier owns, leases or manages approximately 2.6 million acres of timberlands located in America and 415,000 acres in New Zealand. Institutional investors hold more than 90% of Rayonier’s shares. Adding some timber to your portfolio as a core holding will help your portfolio grow over the long haul.

For a conservative global approach, try S&P Global Timber & Forestry Index Fund (WOOD). This ETF tracks the performance of forestry and timber firms worldwide.

Forty-five percent of WOOD is invested in companies based in the United States and its two top two holdings — Weyerhaeuser (WY) and Rayonier — together account for about 20% of its portfolio.

An even bigger portion of WOOD is invested in global stocks. Canada accounts for 12% of the ETF, while there are large allocations to Brazil, Finland, and Japan.

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