Tree REITS Offer Income And Inflation Hedge
The Dynamic Wealth Report
March 19, 2008
Who Says Money Doesn't Grow On Trees . . .
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?
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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.
• Corn (Below $5.50 per bushel)
After spending the better part of March trading above the $5.50 level,
corn traded limit-down yesterday. This move comes despite news that
farmers planed to plant 6 million fewer acres of Corn. The unused
acreage is being shifted to wheat and soybeans which could generate
greater profits.
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