The Smartest Steel Stocks to Buy With $2,000 Right Now

Tariffs come and tariffs go. And creative businesses often find ways around tariffs. In the long term, investors probably shouldn't focus too much attention on tariffs and, instead, should focus on the quality of the businesses they buy. But investors are emotional and the excitement around the steel tariffs being floated today have pushed up the stock prices of the major domestic steel producers.

Here's why Nucor (NUE 3.10%) and Steel Dynamics (STLD 4.12%) are the smartest steel stocks to buy if you have $2,000 or $20,000 right now. And it has nothing to do with tariffs.

The big similarity between Nucor and Steel Dynamics

There are two basic ways to make steel. There are blast furnaces, which make primary steel, and electric arc mini-mills, which melt down scrap steel to make fresh steel out of it. Blast furnaces are an older technology that is very profitable when steel is being made in large quantities. So in high-demand environments blast furnaces are attractive.

But when utilization is low, blast furnaces usually bleed red ink because of high operating costs. United States Steel and Cleveland-Cliffs make heavy use of this older and less flexible technology.

Image source: Getty Images.

Electric arc mini-mills, which are used by Nucor and Steel Dynamics, are smaller and more flexible. They are easier to ramp up and down with demand and, thus, tend to remain profitable even when steel demand is low. As noted, they also use scrap metal, which makes them more environmentally friendly, with the use of electricity helping on that point, too. The world needs the primary steel that is created in blast furnaces, but using electric arc mini-mills creates a more consistent business.

This is one of the main reasons why Nucor and Steel Dynamics are better investments in the steel sector right now and, frankly, most of the time. That said, when enthusiasm for steel stocks is high, they may lag behind blast furnace heavy operators, like U.S. Steel and Cleveland-Cliffs. There is currently complicated merger news surrounding U.S. Steel, so it is hard to use that stock as an example, but look at the outsize gains in the stock of Cleveland-Cliffs in the chart below.

If you are a long-term investor, you need to stay focused on buying the best, not buying the stock that has jumped the most because of short-term events.

CLF data by YCharts

Buy Nucor and Steel Dynamics first

So Nucor and Steel Dynamics both use advantaged technology; that's great, but only the first step when it comes to choosing a steel investment. They have also focused on diversification, building out businesses in various steel end markets. And, on top of that, each has added specialty manufactured products to their mix. This means they take their own steel and fabricate it into a higher-margin, value-added product. This adds more diversification and improves profitability. Nucor and Steel Dynamics are very well-run businesses.

The proof of that is best seen in their dividends. Nucor, which is much older, has increased its dividend annually for over 50 years. It has entered the highly elite ranks of the Dividend Kings. But remember that steel is wildly cyclical when you consider this fact. In good markets and bad ones, Nucor has consistently rewarded investors with regular dividend hikes. That's only possible if a business has a strong game plan and it is executed consistently and well.

Steel Dynamics, which counts ex-Nucor employees as founders, has increased its dividend annually for 14 years. That's not as impressive a figure, of course, but it is a much younger company. And that streak actually includes that period of time when foreign steel imports were a major industry headwind. So it, too, has proven robust in hard times. There is one subtle difference here, however: Steel Dynamics is in the process of building an aluminum mill. So it is adding a different layer of diversification that Nucor doesn't offer.

CLF Dividend Per Share (Quarterly) data by YCharts

There's nothing inherently wrong with U.S. Steel or Cleveland-Cliffs; the world needs the steel both of these companies produce. But long-term investors need to think beyond the next day, week, month, or even year. Long-term investors need to think in decades. And from that perspective, Nucor and Steel Dynamics have proven to be much more consistent businesses. And that makes them better steel stocks today even if they're lagging behind competitors like Cleveland-Cliffs.

Don't get caught up in the emotions

Far too often, Wall Street gets caught up in some news that will have a short-term impact on an industry. When that happens, stocks can move in dramatic fashion, including both industry leaders and industry laggards. If you think in decades and not days, you need to step back from the news and think about the business you are buying.

In the case of steel, the most consistent and best-run companies in North America have long been clear: Nucor and Steel Dynamics. If you are thinking about buying steel stocks today, you should probably err on the side of quality.