What Is a Timberland Investment?
Investors who want to diversify their portfolio of equities and fixed income products can invest in timberland. There are millions of acres of timberland in the U.S. that's owned by pension funds, charitable trusts, individual investors, and universities. Investors can purchase timberland through a variety of investment vehicles that have a stake in timberland.
Timberland investment instruments are primarily used by large institutional investors such as public and private pension funds whereby the two main underlying assets are tree farms and managed natural forests.
How to Invest in a Timberland Investment
Investors can take a position in timber by investing in timber ETFs (exchange-traded funds), which are comprised of many companies that own forests and produce timber-related products. Also, investors can invest in REITs (real estate investment trusts) that contain one owner of forested land and produce timber-related products.
Making a Profit with Timberland
There are a few ways in which investors can earn a rate of return on a timber investment.
Biological growth means that as trees grow, they increase in weight and density. As biological growth adds volume, the trees become more valuable on a per-ton basis.
Product Value Growth
Upward product class movement occurs when trees grow and mature over time, the number of applications for timber increase. For example, trees that are used to make paper typically take over ten years to grow before they can be used for paper products.
Land appreciation can occur if the timber is located on valuable real estate. For example, if the forested land is located near a populated area, the land could be converted to a golf course or shopping mall after the timber has been harvested.
Timber price appreciation can occur as demand for housing increases. Softwood is typically used in constructions of homes. As a result, an expansionary economy and housing market might lead to increases in timber since demand would be high for softwood.
Steady growth is one of the reasons why timberland is used to diversify a portfolio and as an inflation hedge.
Other Benefits of a Timber Investment
The benefits of timberland investments arise from the tendency for the investments tend to rise over the long term and not suffer from stock market corrections that can affect other investment instruments such as stocks and bonds. Steady growth is one of the reasons why timberland is used to diversify a portfolio and as an inflation hedge.
As prices in the economy increase, the return on stocks is typically reduced. Since timber rises over time, the investment allows a portfolio to benefit from inflation in timber prices.
Risks of a Timberland Investment
Timberland investments are not perfect investments meaning they are vulnerable to risks, which can include:
- High purchase prices that can depress returns over time if the timberland investment was overvalued initially.
- Natural disasters can destroy the forestland eroding an investment.
- Housing market downturns can hurt demand for timber resulting in lower prices.
- Large institutional investors such as public and private pension funds primarily use timberland investment instruments.
- Timber ETFs (exchange-traded funds) are comprised of many companies that own forests and produce timber-related products.
- There are multiple ways in which investors can earn a rate of return on a timber investment including biological growth, and price and land appreciation.
- Guggenheim Timber (CUT) is an ETF that consists of over two dozen companies that produce timber products or own forestland.
Real World Examples of Timberland Investments
As stated earlier, there are a number of ways to invest in timberland besides buying the land as an individual investor. Some of those investment vehicles include:
Guggenheim Timber (CUT) is an ETF that consists of over two dozen companies that produce timber products or own forestland. The dividend yield on this global timber fund is typically over 3% per year.
The iShares S&P Global Timber & Forestry Index ETF (WOOD) tracks the S&P Global Timber & Forestry Index and typically produces a dividend yield of over 2.5%.
Weyerhaeuser Company (WY) is an REIT that invests in forestland in order to manufacture, sell, and distribute forest products. Weyerhaeuser Co. is one of the largest owners of forestland in the world.
It's important to note that a REIT will typically have more volatility or price fluctuations with it since it invests in one company as compared to a timberland ETF, which is more diversified. However, the returns might also be different for each of the investments outlined above. As always, any timberland investment should be part of a well-balanced portfolio of investments.