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I believe that many investors would be well served to add exposure to timber and timber-related products to their portfolios, given the historically low correlations this asset class has with more mainstream investments, among other reasons.

Timber as an asset class has also outperformed the S&P 500 and the broad bond markets between 1994 and 2008, with a lower level of risk than equities. There’s also plenty of evidence to suggest that timber is a good hedge against inflation, a phenomenon that I’m afraid we’ll all be relearning the hard way over the coming years, given all the debt we’ve been floating as a nation. Vince Farrell did an excellent job of explaining this in his Dec. 4, 2009, column.

One of the interesting ways to gain exposure to timber is through publicly traded companies that utilize the REIT structure. That means, among other things, that they have to pay out at least 90% of taxable income to shareholders. This not only creates some interesting income generating opportunities, it gives shareholders exposure to what I consider to be a renewable resource, albeit very slowly renewable. The timber REITs also own vast amounts of land, and this presents the potential to sell off properties that potentially have a higher and better use than for timber.

Plum Creek TimberNYSE” PRIMARY=”NO”/> is the largest private landholder in the U.S. and the first-ever publicly held timber REIT. The company owns nearly 7 million acres in 19 states, with the largest concentrations of property in Montana, Maine, Michigan, Arkansas, Mississippi, Georgia and Florida. For perspective, consider that 7 million acres is more than 10,900 square miles, or an area 105 miles by 105 miles. That’s larger than the area of nine states, and roughly the size of Massachusetts, Delaware and Rhode Island combined. About 1.7 million of those acres are of “higher and better use,” of which the company intends to divest itself over the next 15 years for conservation, residential or recreational uses. Last year, timber accounted for about 57% of the company’s $1.61 billion in sales.

I last wrote about Plum Creek back in June, after a Barron’s article suggested that PCL shares were severely overpriced and worth just $10 to $15. This helped to send the stock from the mid-$35 range to around $28 in fairly short order, but since then shares have risen back to the $36 range.

Plum Creek currently yields a very solid 4.7%. Shares don’t exactly appear to be cheap at 25 times trailing earnings and 26 times 2010 consensus estimates, but Plum Creek has historically traded at a higher multiple, averaging about 24 over the past five years. I’ve always considered Plum Creek to be a best-of-breed company, although from a valuation perspective, it has some competition these days from RayonierNYSE” PRIMARY=”NO”/>.

Rayonier, the seventh-largest owner of private timber land in the U.S., owns about 1.9 million acres, or about 2,970 square miles, in nine states and New Zealand, and leases an additional 600,000 acres. The company’s primary business, Performance Fibers, which manufactures cellulose specialties that are used in packaging, plastics, yarn, cosmetics, food products and cigarette filters, to name a few products, generated more than 71% of last year’s $1.17 billion in revenue. Unlike Plum Creek, Rayonier generates just a fraction of its revenue from actual timber sales — 13.6% in 2009. Like Plum Creek, Rayonier also has a real estate business that at last count held about 100,000 acres with potentially higher and better use.

Shares have been on a tear since last March and have nearly doubled since then. Rayonier currently trades at about 29 times trailing earnings (excluding special items) and 24 times 2010 consensus estimates. Rayonier’s current yield is also 4.7%.

One of my favorite calculations that I use with companies that have vast land holdings is enterprise value to owned acres. In Plum Creek’s case, this works out to about $1,191 per acre; in Rayonier’s case, $2,120. This certainly does not mean that one is better than the other; land comes in many different levels of quality, and this just helps to give me some perspective about how the market is currently valuing a given company, solely on the basis of acreage.

In terms of correlations, both Rayonier and Plum Creek show just moderate correlations to the S&P 500 over the long haul, in this case the past 15 years, at 0.5, and 0.55 respectively. Equally interesting, the correlation between Rayonier and Plum Creek is a fairly moderate 0.55 over the same time frame, giving credence to the idea of the potential diversification benefits of owning both of these companies.