Investing in Construction Stocks

Updated: July 28, 2020, 1:15 p.m.

When you think construction, you probably think of a guy in a hard hat and a reflective vest on a job site. But the construction industry involves everything from the initial planning of a project all the way through painting the walls. And it’s home to a lot of companies you can invest in. Here are some of the industry’s best and strongest construction stocks.

Top construction stocks to buy

Company Description
Caterpillar (NYSE:CAT) Equipment manufacturer
Nucor (NYSE:NUE) Steel company
D.R. Horton (NYSE:DHI) Residential homebuilder

Source: Company websites

Caterpillar: Construction equipment king

Equipment manufacturer Caterpillar (NYSE:CAT) is a massive company. Its size and long track record of producing quality heavy machinery are big advantages, since construction equipment has to be reliable and safe.

Like most construction companies, Caterpillar has had ups and downs over the years. But it has a long history of increasing its dividend nearly every year, during good times and bad.

Caterpillar’s dividend yield -- the percentage rate an investor will earn from the company’s dividend payments alone -- can vary a lot depending on the stock price. Investors should try to buy when the yield is high to maximize their value.

Nucor: A unique steel company

Traditionally, steel companies used huge blast furnaces. In 1968, materials manufacturer Nucor (NYSE:NUE) invented a cheaper process to melt scrap steel into usable steel bars. Today, Nucor is the largest steel manufacturer in the U.S., and one of the most consistently profitable.

Nucor’s shareholder-friendly management has a long history of returning those profits to investors through a generous dividend. It also uses a unique pay structure involving base pay and profit sharing. In the notoriously cyclical steel industry, this keeps expenses low during lean times to avoid excessive debt. As a result, Nucor tends to have very low debt levels compared to its peers.

D.R. Horton: The nation’s top homebuilder

As the largest residential homebuilder in the U.S. by number of units sold, D.R. Horton (NYSE:DHI) has several of the qualities investors should look for in a construction stock, including a strong reputation.

D.R. Horton has a history of low debt levels relative to its peer group thanks to conservative management. The company often posts impressive profits compared to its rival homebuilders, as well as superior cash flow. It’s one of the few homebuilders to pay a dividend, which it has regularly increased during up cycles (although it did cut its dividend by two-thirds during the Great Recession to avoid excessive debt).

Homebuilders’ fortunes tend to bounce around depending on their inventory in various regions of the country, so D.R. Horton may not always outperform its peers. But for investors looking to buy into the residential construction industry, Horton is a solid pick.

A female construction worker points at blueprints on a computer screen while a male colleague looks on.

Image source: Getty Images

Learn about the construction industry

The construction industry consists of three primary sectors:

  • Infrastructure: Public works projects like highways, bridges, and railroads.
  • Industrial: Specialized structures and facilities like refineries, factories, and power plants.
  • Buildings: Encompasses two subsectors:
    • Residential buildings: Homes, usually for single families, but also including multifamily residences like apartment buildings.
    • Nonresidential/commercial buildings: Retail locations like strip malls and stand-alone stores, as well as office buildings, hospitals, and schools.

What kinds of companies are in the construction industry?

Not all industry players are publicly traded companies in which you can buy stock. Publicly traded construction companies tend to fall into the following categories:

  • Equipment manufacturers make construction machinery like bulldozers and cement mixers.
  • Materials manufacturers produce construction necessities like lumber, steel, and cement.
  • Residential homebuilders design, custom-build, and often finance single-family homes and developments.
  • Industrial engineering companies manage all aspects of massive construction projects.

Some construction companies aren’t part of the construction industry. For example, companies that build oil pipelines are usually considered part of the energy industry.

Related topics

How can investors find good construction stocks?

Things to look for in a construction industry stock include:

  • Reliability: If things go wrong with a construction project -- because of poor design or execution, shoddy materials, or defective equipment -- it can cost lives and money. The best construction companies have long track records of safety and quality.
  • Reasonable debt levels: Construction projects have big up-front costs, as do machinery and materials manufacturing, so it’s easy to run up high debt levels. The best companies keep that debt from spiraling out of control.
  • Dividends: A dividend -- a quarterly cash payment to stockholders -- isn’t 100% necessary. But dividend payments can help reward investors for sticking with a company during a cyclical industry downturn.

What are the risks of investing in the construction industry?

The primary risk of investing in construction stocks is that construction markets are cyclical, meaning they go through boom-and-bust cycles.

For example, U.S. construction spending had an extended boom cycle from the 1990s all the way up to 2006 as a result of economic growth. Then spending began to drop, plunging sharply during the Great Recession. In 2011 it began another extended growth cycle. While construction has been considered an “essential industry” by many states during the COVID-19 pandemic, and demand for new residential construction appears to have remained strong, investors should be prepared for a potential slowdown to start at any time.

Before buying any construction stocks, investors need to know where the industry is in its current cycle. A company that’s a buy at the bottom of a cycle may not be worth buying at the top.

Other risks include competition against other U.S. companies for the same customer pool (a concern for both industrial engineering companies and residential homebuilders) and foreign competition (which plagues manufacturers of materials and equipment).

Are construction stocks worth buying?

Construction industry stocks come in many shapes and sizes. Because of that, many -- if not most -- investors can find a top construction stock that fits in their portfolio. However, because it’s a cyclical industry, investors should take the time to look into overall industry conditions, as well as each particular company’s prospects, before buying.

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