Entering text into the input field will update the search result below

Why You Should Consider Investing In Timber


  • Timber offers an uncorrelated, high-returning asset class for diversification and long-term income.
  • Two ETFs offer exposure to the broad sectors that are exposed to timber.
  • Four stocks are setup as Timber Real Estate Investment Trusts (tREITs).
  • We like the dividend growth story of the larger players.

When we build portfolios, we look how the various components and underlying exposures would perform under differing scenarios. We hunt for productive assets (that produce income) while constructing a portfolio that has high amount of diversification among the asset classes and individual securities. This is meant to produce a durable income-generating portfolio that can weather the storms of the markets, especially today.

Often time, one asset class can be in a bear market (like oil recently) while others can be booming [Tech]. We are not buy-and-hold investors but attempt to acquire assets that are trading at value prices, often as contrarian investors with a holding time horizon of at least six months.

We think one asset class that is undervalued and ripe for growth is timber. If the reflation trade is truly back on, timber should be a prime beneficiary.

The Case For Timber

Timber is a fan-favorite of Jeremy Grantham and Harvard University, both of whom have significant investments in the space. Grantham's firm, GMO, publishes a seven-year asset class real return forecast each quarter. Below is the last that had an "other" category which is where they housed the timber asset class.

(Source: GMO)

Their track record over longer periods of time has been fairly accurate, although can be off significantly short term. The table shows the extended valuations we are experiencing today in the equity and fixed income markets. Emerging market stocks and timber are the only two asset classes that offer any significant real return over the next seven years according to their forecast.

Grantham's research noted that over the past hundred years, timber has returned 6.5% annualized. Over the last forty years, the returns have been in the low teens annualized. The National Council of Real Estate Fiduciaries (NCREIF) reported nominal annualized total returns of 12.6% over the past 28 years.

This article was written by

Alpha Gen Capital profile picture
Yield Hunting: Alternative Income Opportunities is a premium service dedicated to income investors who are searching for yield without the high risk of the equity market. We are one of the top experts in closed-end funds ("CEFs") in the country having spoken at many national conferences on how to incorporate CEFs into client portfolios. We manage four portfolios that investors can follow:

- YH Core Income Portfolio: yield ~8%
- YH Flexible Income Portfolio: yield 7.53%
- YH Taxable Core Portfolio: yield 5.24% (some tax free)
- YH Financial Advisor Model

Plus: Muni CEF Shopping List.

Our team includes:

1) Alpha Gen Capital - I am a former financial advisor and investor. Not someone from another career doing this on the side. My analysis is meant to provide safe and actionable insight without the fluff or risky ideas of most other letters. My goal is to provide a relatively safer income stream with CEFs and mutual funds. We also help investors learn about investing and how to properly construct a portfolio.

2) George Spritzer - Another career financial guru who runs a registered investment advisor with a specialization in closed-end funds for individuals. George uses the following investment strategies:1) Opportunistic Closed-end fund investing: Buy CEFs at larger than normal discounts to NAV and sell them when the discounts narrow. 2) Exploit special situations: tender offers, fund terminations, fund activism, rights offerings etc.

3) Landlord Investor- spent his career as a management consultant for public sector clients at a multinational consulting firm in the DC area. He has transitioned to a new career as a full time landlord. His investment portfolio is comprised of two parts -- broad-based index funds and income plays such as preferred stock, CEFs, and REITs. He also owns individual/baby bonds which he buys on margin to boost total return. Landlord is our 'individual preferred stock' expert analyst.


Analyst’s Disclosure: I am/we are long WY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications or other transactions costs, which may significantly affect the economic consequences of a given strategy. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (43)

11146471 profile picture
I am invested in REITs but cash flow rules apply to them as well!
Mebarrett3 profile picture
I was thinking about the recent increase in shipping from online sales. I see lots and lots of (usually oversized) cardboard boxes everyday, and with Amazon moving into delivering groceries right to the door I am thinking that the companies that manufacture cardboard should benefit quite a bit. Any thoughts on this, and which might be the best companies to buy?
rlp2451 profile picture
International Paper (IP)
joesmith323 profile picture
Packaging Corp Of America (NYSE:PKG)
11146471 profile picture
I will not an in depth analysis.

Just see WY fcf 250musd vs dividend of 950 musd for 2016!!!

Are u satisfied?
rlp2451 profile picture

WY (and the other companies in the article) are REITs.

It's good you do not invest in companies you do not understand.
11146471 profile picture
To all prospective investors and the author: Although timber seems like a good idea (who doesnt like a hard asset that comes fron earth and is sustainable?) All timber companies mentioned here are extremely overvalued and very poor in cash generation. Most pay unsustainable dividends with imminent risk of cutting.
Go Lakers profile picture
Exactly why the asset class is NOT for retail investors.
rlp2451 profile picture
All hat no cattle.

Where is the data to support "All timber companies mentioned here are extremely overvalued and very poor in cash generation. Most pay unsustainable dividends with imminent risk of cutting."?
11146471 profile picture
I just read the financial statements that's all!
CCW3 profile picture
Not worth the management fees. Best return would come from owning and managing yourself, paying for a long term forestry mgt plan (which can bring tax advantages to landowners in some states) and having the freedom and discipline to harvest when prices are high and letting the stand grow when prices are low. Even better if the tract can offer your family recreational value (hiking, hunting, snow shoeing, etc.).
Go Lakers profile picture
Disagree CCW3, the fees are completely worth it if you can find someone that can do everything as well as someone who can help find the trees, match it to the rest of your portfolio, sell the harvest and then sell the investment if need be.

And unless you're going to quit your day job and manage it yourself, you have to pay someone something. Consider it the same as a piece of commercial real estate - would you pay someone to clean it, collect the rents, fix the roof, market the space and change the toilet paper or would you do that yourself?

That's what I thought.......especially if your family wants recreational use. The land has to be safe and there likely needs to be roads, trails and the like.

It's complicated and that's why it isn't for retail investors.
rdcrealock profile picture
In regards to owning the real asset, what about fees? If you have to pay someone to manage the land base is it really worth it? Just wondering, any thoughts anyone?
rdcrealock profile picture
PACKER man profile picture
WY grows Souithern Pine for pulp, rotates new cash crop c. 20 years or so and pays a great dividend; what not to like? IP recently bought their mills here in Columbus, Ms for a nice profit...
apt10 profile picture
Great article - very interesting.

Is there contango in timber investing (as per all other commodities)?
Alpha Gen Capital profile picture
Good question apt10. The lumber curve is actually fairly short with just four contracts trading. The commodity is in backwardization at the moment.
The backwardation appears to be a legitimate short term shortage that is expected to resolve itself a housing starts are expected to decline - I think this is a case of bearish backwardation. If it were gold or silver in bkwdtn, I might consider that bullish - maybe - on a sentiment basis.

With lumber, it appears to be tied to temporary trade agreement issues vis-à-vis Canada and the current burst of housing starts.
Austin Craig profile picture
refreshing article.
great article and a nice way to add diversification to a portfolio. I also like the contrarian approach. Do you have an opinion about Enviva (ticker: EVA)? It seems that the wood chips they produce are wanted in Europe as a replacement voor coal in energy generation.
Alpha Gen Capital profile picture
Hi rogier-

Someone else mentioned EVA and we've been researching it. No opinion yet.
ahhh, GIANT CAVEAT EMPTOR on EVA!! They are borrowing to pay that fat divie - not good. Plus their return on asset and return on invested capital (of which they have been doing a lot of for ?) is lousy.

Interst coverage is becoming dangerously low at 1.3 or so. They did drop their WACC but they borrowed a ton - also must have reduced the divie significantly as cash dividends paid went from $300MM in 2015 to $150MM in 2016 - not comforting.

Ohh, and let's see, they are one step down from coal in the energy food chain - not sure if that's a great place to be.
"TIMBER" is the operative word of caution here - this is an apt term to use in connection with investing in this industry at this time. Instead of recommending investment in the segment, the author should be screaming TIMBER.
john.fAIrplay profile picture
Thank you for your fact-free post.
I bought FBR because it owns lots of forest land and was reasonably priced.
joesmith323 profile picture
The USA will restrict Canadian timber in the short run and cost American consumers a bunch of money. We've been down this road multiple times before and Canada has consistently won the trade dispute decisions.

Fundamentally the problem with the American position is that Canada sets the volume of the harvest at a number below the biological limit and it is the volume of the Canadian harvest that determines volumes and prices in the US of Canadian lumber. If the Canadian "stumpage" is somehow below a market price then the difference will go into the pockets of Canadian forestry workers and not effect the American market.

If Canada reforms forest tenure and stumpage policies without changing the size of the harvest, there may be winners and losers in Canada but the same amount of Canadian lumber will cross the border at the same price.
Humble Eagles profile picture
The timber REITs could drop a bit and I would sure like the yields better. They seem expensive here to me. Timber is a good asset, but you need to go in eyes open. The risks are very real. Drought, beetles, fire, etc. I wonder if the 2-5% is net of losses? Sounds low for annual growth.
As a forester, I've done a lot of forest inventory, timber cruising, and appraisal work. A 2 to 5% annual growth rate is spot on, depending on the age of the timber. Young stands grow fast, but their relative additional incremental volume growth is small. Older timber with larger diameters accumulate growth ring additions at a faster (higher end) % rate of growth. However, the trend in forest harvesting these years is for shorter rotations and therefore cutting of smaller diameter trees that have not had the opportunity (in years) to add the larger annual growth that large diameter trees experience. As for the risks, the historic scale of fire and insect damage epidemics is, in fact, growing, but the relative size of these deleterious events is annually quite small relative to the overall acreage of forest land. Therefore, their impact on a 2 to 5% growth rate is negligible.
Humble Eagles profile picture
Thx for the great explanation, genstrom. My experience was as an owner and even though you might consider the risk zero mathematically, we considered it very real. I thought the number I was told was higher, but maybe our site index was better than average.
rlp2451 profile picture
Southern pines can easily surpass 10% annual growth for the first 25 years if they are properly managed on a well drained, high site index location.
Go Lakers profile picture
Timber is a very tough asset class to get access to as a retail investor. High net worth investors should seriously consider timber because they get to own actual timber plots, and that's by far the best way to invest in timber because then you get the decide how the investment delivers its returns to you as well as being able to maximize the tax efficiency of timber.

The two recommendations in this piece have significantly underperformed the S&P 500 but owning actually timber plots has significantly outperformed the S&P 500, especially after taxes.

Timber is a little like private equity, venture capital and hedge funds - it is almost certain that any retail version of these hard-to-invest-in asset classes will never measure up to, for lack of a better term, the "real thing".
CCW3 profile picture
I agree that owning timber tracts outright has advantages for HNW investors, but don't dismiss this alternative investment idea for retail investors. We owned PCL for many years, and it provided healthy long term returns and asset diversification.
Alan Young profile picture
Exactly. Timber stocks increasingly reflect the value of their real estate holdings and trades, ot the timber itself.
john.fAIrplay profile picture
Very good thoughts. I am also long WY, primarily for the solid yield.

The other wild card in this space is whether the Trump Administration has any interest in freeing up federal forest lands (USFS + BLM) for timber harvest. In particular, taking some action that allows increased salvage on lands burned over due to fuel build-up caused by the low harvest of the past 25 years would be welcome both for the industry and the environment.
rlp2451 profile picture
I'm not sure that increased supply is a good thing for timber REITs. Additional harvest would lower prices and be detrimental especially with housing starts as low as they are now.
john.fAIrplay profile picture
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.