With the market in its current state of fear and confusion, investors are looking for any signs of safety. This is evident by the current paltry rates on T-bills. While treasuries will provide safety, long-term investors, especially those with decades to spare, can do better and still remain safe.

Think Timber
Raw land and timber have been great places to position long-term money over the years as they have historically outpaced inflation. Timber has a low correlation to other asset classes and has served as a great diversification tool. Its replenishable asset base makes it ideal for long-term investors who have decades to wait. However, unless you're an institutional investor, like an Ivy League school endowment purchasing 100,000 acres worth of raw land in British Columbia, it is next to impossible. Regular investors do have a few choices in order to play the space, however.

Skip The ETFs: Buy The REITs
Recently Claymore Securities launched an exchange-traded fund (ETF) tied to the Clear Global Timber Index. This Index tracks a global group of stocks involved in the ownership and management of forests for the production of pulp and wood-based products. The ETF is called the Claymore/Clear Global Timber Index ETF (AMEX:CUT). Barclays Ishares followed suit by providing exposure to timber with a listing of its iShares S&P Global Timber & Forestry Index Fund (Nasdaq:WOOD).

While the Ishares and Claymore-traded funds may be useful to some investors, I think they miss the mark. Investors looking to participate in pure land ownership should look elsewhere. Each of the ETFs, in addition to timberlands, own a heavier weighting to paper-product companies, packaging firms and agricultural products. This makes them poor choices for a pure raw timberland play. While the ETFs are not necessarily bad funds, as they have their purpose, for most of us that purpose is lost.

Investors wanting to own a "pure" play of timber and forest land should focus their attention on the few Real Estate Investment Trusts (REIT) in the sector. While these are not 100 percent timberland owners, as they own saw mills and other tree-based side businesses, they are significantly greater correlated to the asset class than the ETFs and are the best way non-institutional money can own a piece of the timber pie.

In addition, these timber REITs offer healthy dividends over the miserly rates offered by the two ETFs - currently less than 1 percent for the Claymore fund and a 2.9% proposed yield for the Ishares. Timber REITs also benefit from a unique piece of tax code. Due to the fact that their main asset is harvested after a long period of time, their dividends are generally treated as a long-term capital gain and taxed at a maximum 15%.

Three Picks
Plum Creek Timber
(NYSE:PCL) is the first and largest publicly held timber REIT, owning almost 8 million acres of timberland in 18 states. The former Burlington Resources spin-off was originally structured as a master limited partnership but converted to the REIT structure in 1999. In addition, Plum Creek owns and operates 10 wood-product manufacturing facilities and reserves rent and royalty payments via various activities on its land, including hunting leases and natural resource claims. It recently completed a two-year, $9.5 million project installing the world's largest biofilter in its Columbia Falls fiberboard plant. Vice President Henry Ricklefs feels this highly efficient technology might cost a little more than alternatives in the beginning, but it will be an environmentally sound product that will last longer.

On October 21, the board approved a $200 million buyback program. This allows the company to periodically buy back common stock using open-market purchases. Currently the shares yield around 4.4% or $1.68 per share.

Rayonier (NYSE:RYN) controls 2.6 million acres of forest territory certified by the Sustainable Forestry Initiative, including 343,000 acres in New Zealand. Rayonier recently put its New Zealand acreage up for sale to capture value for shareholders. The company also receives 40% of its revenue from sales outside the United States and Canada. This gives shareholders some international exposure. Rayonier is yielding 6 percent, or $2 a share, and has grown its dividend at an annualized 29% rate over the last five years. At a price-to-earnings ratio of 13, it is the cheapest of the three timber REITS.

Potlatch (NYSE:PCH) can trace its origins back to 1903 with its founding as the Potlatch Timber Co. While it is the smallest land owner of the three, the company still holds an impressive 1.7 million acres. Potlatch is also the only publicly traded forest land owner whose core reserves are 100% certified by the Forest Stewardship Council and the Rainforest Alliance. On October 23, it released its third-quarter earnings report. Net income fell 38% to $25.3 million, or earnings per share of 63 cents, down from $1.04 per share in Q3 2007. Even though this was a substantial drop, it beat earnings estimates of 51 cents, according to Reuters.

Recently, Potlatch announced plans for a tax-free spinoff of its pulp-based businesses to shareholders. The new company will be called Clearwater Paper. This would make Potlatch a more timber-focused entity. Potlatch closed the trading day down 2.9% at $32.84 and is paying over a 6 percent dividend yield or $2.04 per year.

Bottom Line
Timber/raw land is a great long-term, low-correlated asset class that provides inflation protection. For the timber exposure, aside from owning natural land itself, individual retail investors could bypass the two current ETFs and pick up shares of previously mentioned REITs.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares JPMorgan USD Emerg Markets Bond

    Learn about the iShares JPMorgan USD Emerging Markets Bond fund, which invests in bonds of sovereign and quasi-sovereign entities from emerging markets.
  2. Mutual Funds & ETFs

    ETF Analysis: SPDR Dow Jones International RelEst

    Learn how the SPDR Dow Jones International Real Estate exchange-traded fund (ETF) is managed and for whom the ETF is most appropriate.
  3. Active Trading Fundamentals

    How Hedge Funds Front-Run Index Funds to Profit

    Understand what front running is, and learn how hedge funds use this investing strategy to profit from the anticipated stock buys of index funds.
  4. Mutual Funds & ETFs

    ETF Analysis: Schwab US Large-Cap

    Discover how the Schwab U.S. Large-Cap exchange-traded fund is managed, the index it tracks and the investors for which it is most appropriate.
  5. Mutual Funds & ETFs

    ETN Analysis: Rogers Intl Commodity Energy Total Return

    Learn more about the Rogers International Commodity Total Return, which is an exchange-traded note that tracks a broad index of commodity futures.
  6. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  7. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  9. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  10. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!