Tapping Timber's Potential

Because it's a REIT, Plum Creek pays out most of its earnings in dividends. However, because the government wants to encourage timber companies to replant the land they harvest, the tax bite on owners is "almost entirely as long-term capital gains, not as ordinary income." Thus, with a company like Plum Creek "you get to keep most of your 5.25% yield," according to one emailer who also said to make sure you have a good accountant who can distinguish between the different tax rates; otherwise, you'll pay more in taxes than you should.

Besides Plum Creek, other names to consider are:

St. Joe Co. (JOE - commentary - Cramer's Take), the "largest single landowner in Florida, I believe, [with] more than one million acres of land."

Rayonier (RYN - commentary - Cramer's Take), which Jean-Marie Eveillard told TheStreet.com's Stephen Schurr in a recent interview is "like owning timber at a 30% discount." However, "we're keeping in mind it's the business that will endure, not stock that will do best."

Louisiana Pacific (LPX - commentary - Cramer's Take) owns "a ton of timber, a great deal which is on the market for sale right now." Also, "I'd suggest LPX for a trade from $11 to $14-$15."

Timberwest (TWTUF:OTC BB): "I can't figure out how the whole tariff war will play out, so I own both U.S. and Canadian timber plays." Timberwest's yield, the reader points out, is more than 9%.

Upm Kymmene (UPM - commentary - Cramer's Take). "It's good to have a mix of domestic and foreign timber, because currency fluctuations affect exportability."

If you want to own a sector fund rather than an individual company, there's always the Fidelity Select Paper and Forest Products. Says a reader: "Obviously contains paper stocks, but as timber goes up, they can justifiably use that as rationale for raising prices and making it stick."

RealMoney contributors also shared their thoughts on timber.

Arne Alsin, who lives in Oregon, says a tree farmer he knows complains about "cheap timber being dumped on the market from Canada, and now it's Russia [from Siberia] into the Northwestern ports, like Seattle."

Meanwhile, Howard Simons is cool on timber as an investment. "The forest products stocks like Weyerhaeuser (WY - commentary - Cramer's Take) have underperformed in a housing boom, the industry has big environmental issues that dampen its performance, it's subject to the vagaries of the Canadian softwood lumber agreement, etc."

Howard also asks, "Can you just play the price of wood with lumber or OSB [oriented strand board, the successor to plywood] futures? The two-by-four random-length contract is the more liquid of the two, but even that one's pretty illiquid except in very small size. OSB is practically impossible to trade. The Philadelphia Exchange has a forest products index, which is weighted toward the paper, as opposed to the lumber, stocks. There are options on the index, but they are thinly traded. The FPP index has underperformed the S&P 500 by 23.06% over the past year on a total return basis."

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Hewitt Heiserman has been a financial analyst for 15 years and has worked for Fidelity Investments, Simplex Time Recorder, American Holdco and Breakaway Solutions. He is now writing a book on the Earnings Power Box, an analytical model he created to gauge the quality of a firm's profits. (The Earnings Power Box is a trademark of Hewitt Heiserman.) At the time of publication, Heiserman had no positions in any of the securities mentioned in this column, although positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Heiserman appreciates your feedback and invites you to send it to [e-mail].