Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Timber REITs Pay Dividends from the Ground Up
Transcript
- Lucas: So I've been looking at an income sector this week that most dividend investors don't think about until someone brings it up at a dinner party, and then they go, oh right, trees. Timber REITs. Luna: Timber real estate investment trusts. As in, companies that own forests and sell lumber. That's the business model? Lucas: Exactly. The biggest one is Weyerhaeuser, ticker W-Y. They own or manage about 11 million acres of timberland in the U.S. and Canada. They grow trees, harvest them, sell the logs to sawmills and paper producers, and then they plant new seedlings. It's a biological cycle that produces cash flow every year. Luna: And because it's structured as a REIT, they have to pay out at least 90 percent of taxable income as dividends. So you get a yield that's tied to the actual growth of trees and the price of lumber. Lucas: Right. Current yield on Weyerhaeuser is around 4.3 percent. Not spectacular compared to some high-yield stocks, but the interesting part is how the dividend behaves over time. Timber REITs have historically been a decent inflation hedge because lumber prices rise when construction demand goes up, and trees keep growing regardless of what the economy does. Luna: I remember reading that during the 1970s high-inflation period, timberland was one of the best-performing asset classes. The trees just kept adding biomass and the dollar kept losing value. Lucas: That's the biological compounding part. A forest grows about 4 to 6 percent in volume per year on a sustained-yield basis. That's before you even sell a single log. So the underlying asset itself is producing real growth. And when you combine that with the REIT structure, shareholders get that growth passed through as dividends. Luna: But there's a nuance here that a lot of people miss. Not all of that dividend is ordinary income. A portion of it gets classified as return of capital, right? Lucas: That's the tax advantage. Because timber is a depletable asset, the IRS allows REITs to treat part of the distribution as a return of capital rather than a dividend. That means you don't pay taxes on that portion immediately. It reduces your cost basis, so you defer the tax until you sell the shares. For someone in a high tax bracket, that's a meaningful difference compared to a regular corporate dividend. Luna: So you get a 4.3 percent yield, part of it tax-deferred, with an underlying asset that's growing physically every year. That sounds almost too good. Lucas: The catch is volatility. Lumber prices are cyclical. In 2021, lumber futures hit over $1,600 per thousand board feet. This year they're around $450. So Weyerhaeuser's earnings swing with that. But the dividend has been pretty steady because they manage the harvest schedule. They can slow down cutting when prices are low and accelerate when prices are high. That optionality is built into the business model. Luna: So they're not just passive landlords. They're actively managing a biological asset with a multi-decade time horizon. Which is very different from a typical office or apartment REIT. Lucas: Totally different. And that's why I think timber REITs deserve a closer look, especially with the 10-year Treasury at 4.55 percent. A lot of income investors are chasing bonds right now, but bonds don't have that built-in growth. Timber REITs offer a yield that can actually increase over time if lumber prices recover or if the land appreciates. Luna: If today's conversation gave you a new lens for thinking about dividends, you know what keeps these shows ad-free and independent. It's listener support at buy me a coffee dot com slash fexingo. Just a small way to say this stuff matters. Lucas: Yeah, and we genuinely appreciate it. Every coffee helps us dig into niche topics like this one. Luna: So back to timber. Another name I like is Rayonier, ticker r y n. They're a pure-play timber REIT without the manufacturing exposure that Weyerhaeuser has. Lucas: Good point. Rayonier owns about 2.6 million acres, mostly in the U.S. South and Pacific Northwest. They focus exclusively on selling timber, so their dividend is more directly tied to lumber prices. Current yield is around 4.1 percent. Their payout ratio has been conservative, around 60 percent of adjusted funds from operations. Luna: And then there's CatchMark, ticker C-T-T, which is smaller but has a similar model. Their yield is a bit higher, around 5.2 percent, but they have a shorter track record. Lucas: The risk with smaller timber REITs is that they have less acreage and less diversification in geography and customer base. But they can offer higher yields because the market perceives more risk. For a dividend investor who wants stability, Weyerhaeuser is probably the anchor. They've paid a dividend every year since 2003, and they've increased it in 10 of the last 12 years. Luna: That dividend growth record is solid, especially considering the cyclicality of the underlying commodity. It shows the management team is disciplined with capital allocation. Lucas: Exactly. And one more thing that's interesting right now. Small-cap stocks have been ripping higher. The Russell 2000 is up 3.1 percent in the last five days. Timber REITs are small- to mid-cap, so they've been participating in that rally. Weyerhaeuser is up about 2 percent this week. That's a nice tailwind on top of the dividend. Luna: But if you're buying timber REITs, you're not buying them for price appreciation. You're buying them for the income stream with a long-term growth component. The price volatility is just noise if you're holding for the dividend. Lucas: Right. And the other key factor is that timberland as an asset class has a very low correlation with stocks and bonds. So it can actually reduce portfolio volatility over a full market cycle. A study from the University of Georgia found that adding 10 percent timber REITs to a 60-40 portfolio reduced volatility by about 1.5 percent annually without sacrificing returns. Luna: That's a compelling diversification argument. And it's not just financial. There's an ESG angle too. Well-managed timberlands sequester carbon, protect watersheds, and provide wildlife habitat. Some institutional investors are adding timber for the sustainability metrics. Lucas: That's a growing trend. But for the dividend investor, the bottom line is cash flow. You get a yield that's competitive with bonds, tax-advantaged, and backed by a real asset that literally grows. It's not exciting. It's not a tech stock. But it's the kind of thing that can anchor your income portfolio for decades. Luna: And the biological compounding is something you can't replicate with a factory or a software subscription. Trees don't have downtime. Lucas: They really don't. So if you're looking for income ideas beyond the usual suspects, timber REITs are worth a weekend of research. Weyerhaeuser, Rayonier, CatchMark, and even PotlatchDeltic, ticker p c h, are the big names to start with. Luna: And as always, check the payout ratio relative to adjusted funds from operations, not just net income. That's the right metric for REITs. Lucas: Great advice. That's all for today on Dividend Investing with Fexingo. We'll be back next week with another income angle.