Is Timberland a Better Long-Term Investment than Gold?

I write about timberland and timber investments every few months because I truly believe they are a great long-term investment.

How great?

According to a 2011 report published by Bank of America (NYSE: BAC), “Timberland has produced annual returns that have often matched or outpaced the S&P 500 Index over the long term but with notably less risk. Between 1991 and 2010, for instance, timberland’s average annual return was 11.16%, versus the index’s 9.03%.”

Even during bear markets in timber prices, timberland continues to grow – literally – in value. That’s because healthy trees grow between 4% and 6%, regardless of what happens to the economy or the stock market at large. And trees grow with little investment, upkeep or expense.

I’d write about timber more often, but I know it’s boring, and honestly, it’s a difficult asset class to get exposure to for most investors.

So we already know that timberland is better than the stock market as a long-term investment. But how does it stack up against another commodity – like gold?

Timberland gained an average of 11.16% annually between 1991 and 2010. Gold only averaged 7% gains annually during that same period.

But that’s somewhat of an unfair comparison. Gold and timber fulfill vastly different market needs. You don’t buy gold for growth. You want to own gold to protect the value of your savings from government inflation or currency crisis.

You own timberland as a long-term investment – betting on the growth of trees and the necessity of timber products in the global economy.

It’s a point I make frequently: an investment is different than a liquid and safe cash position. You don’t expect cash to do anything except hold its value – so gold is just a superior form of cash than most other forms.

An investment returns capital to you – creating cash.

There are a few timberland real estate investment trusts (REITs) – and they pay pretty healthy dividends, but they’re by no means a pure play on timberland.

Ideally, you want to own timberland outright. If you live pretty much anywhere in the lower 48 states outside of major cities and prairie, it’s likely that you’re not far from timberland.

I recently spoke with a former appraiser for one of the world’s biggest timberland companies, Weyerhauser (NYSE: WY).

His job was simple: to decide whether a tract of land was best suited for timberland – or not.

If it was best suited, then he might go in and look at the type of trees and maybe the age and density of trees. But his major concern was the best use for the land.

Obviously, the best use of land mostly has to do with location. If it’s next to a major interstate and outside of a heavily populated area, a piece of land may not be best used as timberland.

But if a piece of land is remote, not too swampy, not too hilly and already has a good amount of healthy trees on it – you’re probably looking at timberland as its best use.

If you’re not in the market for buying timberland, I’d suggest waiting until timberland REITs like Weyerhauser get cheaper. Another two to look into are Potlatch Timber (Nasdaq: PCH) and Plum Creek Timber (NYSE: PCL).

I’d lean towards Plum Creek out of the three, as it tends to have the higher yield. Unfortunately, all three of these companies are expensive right now. Wait for them to come back to earth during a market correction. Put them on your shopping list and be patient.

If you’re comfortable doing so, consider selling puts on these companies at a price you’d like to pay.