Wood plastic composites (WPCs) are a new class of materials which combine the characteristics of plastic and wood. In appearance, they are similar to wood, but the low stiffness of plastics makes the composite modulus significantly lower than that of solid wood. Increasing the wood content in the WPCs can improve stiffness, but the rate of water absorption also goes up. Here, nanoclay was compounded with wood and plastic using a twin screw extruder to form a three-component composite to improve the stiffness of WPCs. To overcome the previously observed reduction in strength and increase in the rate of water absorption, different compounding procedures were used. It was found that pre-compounding wood flour with polymer followed by incorporation of clay in a second step resulted in an increase in stiffness, retention in strength, and a reduction in the rate of water absorption. Thus, adding nanoclays is an alternative for increasing properties instead of adding extra wood flour to a concentration in excess of 55 wt% as this involves processing difficulties. POLYM. ENG. SCI., 50:2013–2020, 2010. © 2010 Society of Plastics Engineers