Tree REITS Offer Income And Inflation Hedge
If today’s Dynamic Wealth Report is reaching you a little later than normal I apologize. It’s my fault. I was a little slow getting started this morning. See, last night I met up with some good friends at a local brewery.
What was supposed to be a quick drink lead to . . . well, we closed down the bar! All night we gorged on greasy and salty bar food and of course lots of liquid refreshments. But this was not a night of drunken debauchery. I was with a great group of guys who are all very accomplished.
Needless to say our varied topics of discussion quickly rose above the average bar chatter (at least on a Tuesday night). We discussed and argued about jobs, religion, women, politics, and of course the markets. It’s strange but somehow every conversation I have eventually moves into a discussion on the stock market. I guess it’s my favorite subject.
An interesting observation on the markets. . . .
Given the market gyrations over the last few weeks nobody was willing to go out on a limb and call this week the market bottom. Despite the recent Fed action, the collapse of a major Wall Street institution (Bear Stearns), and the amazing 400 point rally – everyone hedged. “Maybe we’ll know more in a few days”. “Let’s see how the dollar reacts.” “Maybe when we break the resistance of the downtrend channel.” Huh?
Who knows if we hit bottom yet . . .
This got me thinking. Is there an investment that has been relatively stable in the markets lately? Maybe something that would benefit from the declining US Dollar? Something that might give some protection from inflation? And maybe it could throw off some cash flow as well?
Impossible you say . . .
Well . . . not quite. I started thinking through all of the different types of investments out there. Common stock, Muni Bonds, Preferred Stock, Corporate Bonds, TIPS, Government Bonds, Options, Warrants, Convertible Securities, Derivatives. In my 10 years as an Investment Banker I had created many of these securities . . . then it hit me. REITs.
For those of you who don’t know, REIT stands for Real Estate Investment Trust. It’s a special type of designation given by the IRS. It allows for a company to distribute earnings pre-tax to its shareholders. The REIT designation eliminates the double taxation normally associated with corporate dividend payments. The REITs traditionally invest in real estate which throws off steady payments to the company. There are many different types of REITs – some are better than others. Before I tell you which ones I like, let me tell you why I like them.
When the housing market started collapsing the REITs were hit hard. Just take a look at the iShares Dow Jones US Real Estate Index (IYR). This index holds a basket of REITs, and the index fell more than 30% from a peak of $93 to its current price of $64. Needless to say some of the good REITs got thrown out with the bad. Many of these REITs have stabilized and are trading at good values.
What you need to know about specialty REITs
One particular group is classified as a specialty REIT. They own land . . . filled with trees. Yes, timberland. Now let me tell you why I like these Tree-REITs. First, the timberland they own is actively managed. They harvest trees for things like lumber and pulp for paper. The prices of these commodities are going up and up because of the weak dollar.
When the Tree-REITs sell their trees they generate a nice income – which is sent to shareholders in the form of dividends. All of these Tree-REITs are paying dividends around 5%. That’s better than government bonds.
In addition, the timber grows every year. The sun shines, the rain falls, and the trees get bigger – and that means more valuable. Also, timber is considered a hard asset. The US is already in an inflationary environment (whether the government wants to believe it or not). Owning hard assets is the best way to profit from inflation.
The Tree-REITs
I have found three different publicly traded REITs that hold timber. The first is Rayonier (RYN) which holds more than 2.6 million acres in the US and New Zealand. Rayonier also has two other core businesses, one in traditional real estate development and the other in fiber production (so it is not a pure play Tree-REIT). The second company is Plum Creek (PCL) which owns 8 million acres of timber. The third company is Potlatch (PCH) which owns 1.7 million acres of timber.
These Tree-REITs tend to be relatively stable, throw off a good dividend, benefit from a falling dollar, and are a great hedge to inflation. Consider one – or all of these – for your portfolio today.
Category: Real Estate
