Please ensure Javascript is enabled for purposes of website accessibility

Get Paid While You Wait: 3 Top Dividend Stocks in Lumber

By Jim Halley - May 31, 2021 at 8:20AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

These three lumber REITS provide a dividend that's a cut above the rest.

The cost of lumber has increased 300% over the past 12 months, according to National Home Builder Association statistics. The reason is simple economics -- increased demand and limited supply. When the pandemic first began, home construction came to a standstill and a lot of sawmills and lumber processing facilities shut down. Then, the boom in remodeling and home building started early last summer and the mills went from having too much wood to not enough very quickly.

The demand has shown no sign of ebbing and trees take time to grow, so the supply side will keep lumber costs high for a while. Another reason why lumber supplies are down is that mills can't keep up with processing the wood that is being felled. On top of that, the rise in lumber costs may likely rise because the U.S. Commerce Department last week said it would like to increase tariffs on Canadian lumber from 9% to 18.32%.

This provides a great opportunity for investors to get in on what is likely to be growth trend for a while. Even better, these three timber real estate investment trusts (REITs), CatchMark Timber Trust (CTT 0.45%), Rayonier (RYN 0.27%) and PotlatchDeltic (PCH 0.38%) all offer a dividend yield of at least 2.7%.

Newfound Gap in the Smoky Mountains.

Image source: Getty Images.

PotlatchDeltic's balance gives it an edge

PotlatchDeltic just raised its dividend in December by 2.5% to $0.41 per share. At today's prices, that works out to a yield of 2.72%. The company's stock is up more than 69% over the past 12 months and more than 18% this year.

Unlike the other two REITs, PotlatchDeltic is on both sides of the timber industry. It owns 1.8 million acres of timberlands in Alabama, Arkansas, Idaho, Mississippi, Louisiana, and Minnesota, but through its taxable subsidiary, it operates a plywood mill and six sawmills.

In the first quarter, PotlatchDeltic reported net income of $131.1 million, up 31% sequentially and compared to a loss of $16.8 million in the same period in 2020. It reported revenue of $354.2 million, up 5% over the prior quarter and 69.5% over the same period in 2020. The company's cash from operations of $169.9 million easily helped cover its dividend outlay of $27.5 million in the quarter and represented a rise of 17.6% sequentially and 251% year over year.

While lumber prices can be volatile, the company has increased its EBITDA margin by 86.5% over the past three years since Potlatch merged with Deltic Timber in 2018. So, it appears to not only have become a larger company, but also one that is more efficient.

RYN Cash from Operations (TTM) Chart
Data by YCharts.

CatchMark shows increased revenue

CatchMark is a timber REIT that owns 1.5 million acres of timber land. Timber REITs buy land, grow trees, sell the harvested trees or the land, and then do it again. The beauty of timber REITs is they utilize a renewable resource.

CatchMark's stock is up more than 56% over the past 12 months and more than 12% this year. In the first quarter, the company's reported revenue was $27.7 million, up 7% year over year, while the company reported a net loss of $0.6 million, which was an improvement of 87% over the same period in 2020. The company had $12.9 million in adjusted EBITDA, which was flat year over year.

CatchMark, which owns forests in the South and Pacific Northwest, has a quarterly dividend of 1.35 cents per share, which works out to a current yield of 4.46%. The dividend is well covered. In the first quarter, the company distributed $6.6 million in dividends but had $11.6 million in cash from operations, which was up 3% year over year.

Rayonier's size gives it an edge

Rayonier is the second-largest timber REIT behind Weyerhaeuser, with 2.7 million acres of timber land in the United States and New Zealand. The company's stock is up more than 55% over the past 12 months and more than 27% this year.

The company's first-quarter numbers didn't wow anybody -– revenue was down 26% year over year and operating income was a reported $28.5 million compared to $38.6 million in the same period in 2020, but the most important number for a REIT -- cash from operations -- was up considerably. The company said it had $53.9 million in cash from operations, compared to $29.2 million in the same period in 2020 and well above the $37.5 million it said it paid out in dividends.

The company offers a quarterly dividend of $0.27 per share, which works out to a yield of 2.84%. What is also exciting is the company is finding a variety of uses for its timberland, such as renting out locations for bee keepers or installing a wind farm on a ridge.

Rayonier completed its purchase of Pope Resources in May 2020 for $554 million, giving Rayonier a larger timberland presence in the Pacific Northwest. In the first quarter, that segment was a bright spot for the company with an adjusted EBITDA of $17.6 million, up 81% year over year.

How long will the opportunity last?

It's reasonable to wonder if it's too late to be buying into timber REITs and whether a boom year ahead has already been priced in at the stock market. The rise in lumber prices caught a lot of people off guard and they could just as easily fall. However, the potential addition of tariffs on Canadian wood is a new wrinkle that could help keep U.S. timber prices high. There's also a pretty big moat regarding timber. Lumber companies can't suddenly increase production, so supplies will likely be tight for a while.

Of the three dividend stocks, I like PotlatchDeltic because of its balance and overall financial strength, not just this year, but for the past three years. I also like CatchMark because of its superior dividend that's well covered by its cash from operations. It has also shown a nice uptick in revenue that looks as if it will continue this year. Rayonier's falling revenue is a concern and one reason why I prefer the other two REITs, though its purchase of Pope Resources seems to be paying off.

Jim Halley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Potlatch Corporation Stock Quote
Potlatch Corporation
PCH
$48.59 (0.38%) $0.18
Weyerhaeuser Co. Stock Quote
Weyerhaeuser Co.
WY
$36.60 (0.47%) $0.17
Rayonier Inc. Stock Quote
Rayonier Inc.
RYN
$37.50 (0.27%) $0.10
CatchMark Timber Trust, Inc. Stock Quote
CatchMark Timber Trust, Inc.
CTT
$11.10 (0.45%) $0.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
389%
 
S&P 500 Returns
125%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/12/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.