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Timber land has become an investment option of interest to a broad and growing range of investors. Several have noted that timber land has historically appreciated at a rate that outpaces inflation. The costs associated with many raw commodities, including timber, are expected to increase if inflation rates increase in the coming years.

Timber prices have become depressed because demand for wood in construction decreased so substantially since the U.S. housing market imploded. This reduced demand for timber has allowed several timber growers to grow their trees more so than they would normally prefer.

Assuming the grown stock is not plagued by some sort of beetle infestation or wildfire, growers should be left with more trees and an older average age of stock. Those older trees should yield superior quality and higher priced wood product in the future, especially if demand does again increase. Many have argued that housing has already bottomed, which could bode well for the timber business and potential future price increases.

Many consider timber real estate investment trusts to be one of the best ways to get exposure to timber. Under the current tax laws, REITs must distribute at least 90% of their taxable income in order to eliminate the need to pay income tax at the corporate level. Timber REIT dividends are taxed as long-term capital gains, and not at the corporate dividend or ordinary income tax rates. Most REIT dividends are treated differently than timber REIT dividends, and are taxed at a significantly higher rate. This also makes timber REIT dividends different than most REIT, bond and traditional equity payouts, and makes timber REITs a rather unique asset class.

Below are recent performance rates for four timber REITs that are publicly-traded in the United States, listed in alphabetical order: Plum Creek (NYSE:PCL), Potlatch (NASDAQ:PCH), Rayonier (NYSE:RYN) and Weyerhaeuser (NYSE:WY). I have provided their present yields, as well as their one-week, 2012-to-date and six-month share performance rates. I have also included the Guggenheim Timber ETF (NYSEARCA:CUT), which holds large positions in timber REITs as well as other business types.

Beyond holding timber REITs, Guggenheim's Timber ETF holds significant positions in companies that produce and sell products made from trees, such as paper and packaging. So far in 2012, these five equities have appreciated by an average of 4.61%. Over the last six months, the group has appreciated by an average of 5.75%.

See a 2012-to-date performance comparison chart for the above-listed timber REITs and timber ETF:

(Click to enlarge)

The broader market, as expressed by either the Dow Jones Industrial Average or S&P 500, has outperformed the average performance of this group over both such terms, but the chart, above, shows that there has been some divergence within this group of timber investments. PCL, WY and CUT have performed more in line with the broader market so far this year, and were outperforming the benchmarks at their recent highs, while PCH and RYN underperformed.

Some of the largest owners of timber acreage within the United States are these above-listed real estate investment trusts. The lack of demand for timber products through the last few years made many of these REITs structure themselves to minimize their expenditures and overhead, including divesting some basic materials and consumer goods segments. The resulting companies are less diversified and considerably more focused upon timber production, with more direct sensitivity to timber price changes.

Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.

Disclosure: I am long WY.

Source: Timber REITs: Where Money May Actually Grow On Trees