Lumber a good gauge of economy
forecast for various types of investments over the next seven years, adjusted for inflation. Their most recent outlook is fairly gloomy: U.S. large-company stocks will lose 2% a year, and high-quality stocks will gain just 0.5% a year.
The standout: timber, which GMO forecasts will gain 4.8% a year, after inflation.
“The fundamental case is that the returns from timber for patient investors should be steady,” says Eva Greger, head of GMO’s renewable resources group. It doesn’t mean that timber will be, well, growing rapidly. “The thing about timber is that it doesn’t move around a lot,” she says. Timber looks better than stocks not because timber is soaring, but because stocks are expensive.
Managed timber has its charms: If the market for timber falls, a manager can simply let the trees stand and grow another year, which makes them more valuable. Over the very long term, demand for timber tends to grow, especially as supply diminishes as forest land gets converted to use in agriculture or real estate development. (Or, more happily, enshrined in national parks.)
GMO wouldn’t recommend timber-related investments, or any investments for that matter. They don’t do that.
You might, however, look at the handful of real estate investment trusts that are devoted to timber. Plum Creek Timber (PCL), for example, is the largest timber REIT, which owns 6 million acres of timberlands in 19 states. But the stock isn’t cheap, despite its current 4.1% dividend yield, and land sales drove 43% of earnings before interest, taxes, depreciation and amortization, according to Morningstar.
A less expensive choice is Rayonier (RYC), which has 2.6 million acres of timberland. One reason it’s cheap: The company sells significant amounts of timber for paper, which will decline in this digital age. And it has overharvested in the Northwest, according to Morningstar. But it should benefit as timber demand increases, especially in the South.
III. You need a lot of patience — and land — to make money growing timber.
High-quality hardwood, such as walnuts, can fetch high prices. Why not skip making an IRA contribution this year and plant a couple of walnut trees instead?
That’s an interesting thought. Greger points out, however, that timber is no sure thing. You’ll have to be on guard against fire, insects and the occasional beaver. You’ll have to trim the trees to grow straight and tall — otherwise, it will be hard to cut a goodsized log out of that. And you’ll need time. So you can learn a great deal from lumber, and, with the right investments, actually make some money. But the best return you can get is to walk outside on a spring morning and see them in bloom.