If You Want Income, Consider Timber Stocks

NEW YORK ( TheStreet) -- Have you noticed how red-hot the timber sector is?

Timber stocks and real estate investment trusts have been in demand largely because they're seen as a play on the recovery of the housing market.

What's more, they pay big, fat, juicy dividends, which makes them attractive when Treasury bonds are yielding so little.

One timber REIT that has rewarded me in the past is Rayonier Inc. ( RYN), which was recently trading at $45.56, a couple of dollars less than its 52-week high of $47.56.

This is a profitable company that buys and develops real estate and manages timberland. It also produces and sells cellulose fibers in the U.S., New Zealand, and Australia.

This company plans to report second-quarter 2012 earnings on July 26, and it wouldn't surprise me if it met or exceeded analysts' expectations. Let's wait to buy in case it misses estimates, shall we?

As of the beginning of the year, Chairman and CEO Paul Boynton owned almost 269,000 shares, which have a current value of about $12.2 million. And as of July 1, chief administrative officer W. Edwin Frazer owned almost $9.9 million worth of shares.

So officers and directors are putting their money where their mouths are, and big investors such as Invesco Ltd. and The Vanguard Group each own more than 4% of the outstanding shares.

The stock pays a $1.60 annual dividend. Given the stock's current price, that translates into a 3.52% yield. Look at the one-year chart below, which shows both the stock's 200-day moving average and the Bollinger bands.

Chart courtesy of Yahoo! Finance

The 200-day moving average is right around $43, and the lower Bollinger band is near $42.

On June 13, 2012, the day after it paid its last quarterly dividend, it hit an intraday low of $42.46, and I have no reason to think it couldn't correct down to that level again.

If it does, the yield will rise 3.77% and you'll be buying shares of RYN at a 6.7% discount to where they closed Tuesday.

There are some other good names among the timber sector.

Potlatch Corporation ( PCH) is a REIT that owns and manages timberland in Arkansas, Idaho, Minnesota and Wisconsin.

It also produces lumber, plywood, and particleboard. This REIT is certainly tied to the housing-recovery theme.

PCH pays a $1.24-a-year dividend. At Tuesday's closing price of $33.72 that equates to a yield of 3.68%. Let's take a peek at its one-year chart, which shows the 200-day moving average and the Bollinger bands.

Chart courtesy of Yahoo! Finance

We can see some red flags here, and the most obvious one is that PCH has risen a lot from its June 1, 2012 intraday low of $28.02. That's a steep 16.9% climb to Tuesday's closing price!

This looks like a good time to sell shares if you have owned the stock since June.

With a little bit of luck, we're likely to see Potlatch shares retreat to less than $29.

Just think, at a share price of $28.50, the yield on PCH moves up to a pleasing 4.35%, and on top of that you'd have some realistic hope for some capital gains down the road.

Two other timber stocks are Plum Creek Timber ( PCL), a REIT that also seems richly priced yet still has an attractive yield of about 4.25%; and forest products company Weyerhaeuser ( WY).

Both PCL and WY are trading at or near 52-week highs. I'd rather sit on my hands and wait to see whether PCL revisits its June 13, 2012 intraday low of $37.03.

I wouldn't touch WY until it flirts with the $19-a-share level, which it exceeded on June 4, 2012 when it hit an intraday low of $18.70.

So be patient, be picky and wait until the herd is yelling, "Timber!"

I don't know how far stocks will fall from current levels, but I'm looking for at least another 5% drop in the S&P 500 before this current correction runs its course.

Remember that with the 10-year Treasury yielding a historically low 1.5%, stocks and REITS that yield about 4% will continue to look tempting to income-hungry investors. This should help reduce some of the risk of ownership, if you are patient enough and picky enough to buy at lower levels.

At the time of publication the author held no shares of stocks mentioned.

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This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.