The Dow Jones Industrial Average is finally having its time in the sun. Although it is down 9.7% year to date, that is far better than the Nasdaq Composite (down 32.5%) and the S&P 500 (down 20.1% ) over the same period. If the Dow does end up outperforming the Nasdaq Composite for the full-year 2022, it will be the first time since 2016.

The simple reason why Dow components are doing well right now is that these companies tend to be industry-leading businesses with a track record for outlasting market downturns. In contrast, many components of the Nasdaq Composite are heavily dependent on low interest rates and fast growth.

Caterpillar (CAT -1.71%), Dow Inc. (DOW -1.32%), and 3M (MMM -2.01%) stand out as three particularly good Dow stocks to buy now. What's more, investing in equal parts of each company produces a dividend yield of 4.3%. That yield is above the risk-free three-month Treasury Bill rate of 4% -- offering compelling passive income potential. 

A construction worker standing on a steel beam with a bright blue sky and clouds in the background.

Image source: Getty Images.

Caterpillar's results speak volumes about the health of its customer base

Daniel Foelber (Caterpillar): Caterpillar stock is up over 9% year to date -- making it one of the few Dow stocks that is not only outperforming the index but has a positive gain on the year. The stock's strong performance is backed by excellent results that illustrate the strength of the company's business units across energy and transportation, construction, mining, agriculture, and more.

Caterpillar is often lumped into the conversation of economic bellwethers that can provide leading indicators of the broader economy. And while there's a truth to that, the company's numbers indicate a growing divide between the consumer economy and the industrial economy.

A lot of the weakness we are seeing in the technology sector, consumer discretionary sector, advertising, retail, and more isn't necessarily transferable to Caterpillar.

A broad economic recession would eventually ripple through to the company. But for the time being, its customers are doing the best they've done in years and ramping up capital expenditures, which benefits Caterpillar. A key point from its recent third-quarter earnings call was that management indicated that customers aren't overspending, which is key in case business slows. The health of Caterpillar's customers is vital for the company's performance and could lead to less volatility between business cycles. In sum, it could become a less cyclical company if its customers exert financial discipline during periods of growth, which would give them the means to upgrade fleets and buy new equipment even during downturns.

Caterpillar stock has a price-to-earnings ratio of just 16.5 and a dividend yield of 2.1%. It's also a Dividend Aristocrat that has paid and raised its dividend for 28 consecutive years.

When looking at the Dow Jones, look to Dow Inc.

Scott Levine (Dow): As the gift-giving season inches closer, investors are likely pinching the purse strings with their stock purchases to increase their buying power for the holidays. With markets suffering steep declines over the past few months, many stocks are trading for a fraction of what they had been earlier this year. But one stock that looks particularly attractive now is Dow -- especially with its enticing forward dividend yield of 6%.

Falling about 32% from its 52-week high, shares of Dow, one of the largest publicly traded chemicals stocks by market capitalization, are trading at about $49 as of this writing. But this alone doesn't illustrate why the stock is a bargain these days. From a valuation standpoint, Dow's stock also looks attractive. Currently, shares are valued at 4.3 times operating cash flow, representing a discount to its 2021 operating-cash-flow multiple of 7; similarly, Dow's stock is trading at 6 times trailing earnings lower than its 2021 trailing earnings multiple of 7.4.

Like so many businesses in various industries, Dow is battling headwinds that are having a material impact on its financials. For example, in Q3 2022, Dow reported year-over-year declines of 4.9% and 54.2% for revenue and earnings per share (EPS), respectively -- a likely factor contributing to the stock's sell-off.

It's important, however, to recognize that this isn't Dow's first rodeo; the company has a history that traces back 125 years. So while it may be disconcerting to see revenue and EPS slide, the company has a track record of negotiating macro challenges that spans well over a century. In addition, its investment-grade balance sheet suggests that it is in a good financial position to weather the present challenges.

The industrial conglomerate's dividend yield will attract income-seeking investors

Lee Samaha (3M): This Dow Jones Industrial Average member's stock is in the middle of an investors' battleground. For the bulls, 3M's legal risk is more than fully priced, and even though the company's operational performance hasn't been great in recent years, its earnings and free cash flow easily cover its dividend per share.

Moreover, with a current dividend yield of 4.8% and shareholder-friendly management determined to maintain the Dividend King's 64-year record of increasing dividends, 3M offers investors a good income and the possibility of management turning the company around. 

MMM Free Cash Flow Per Share Chart

Data by YCharts

On the other hand, the bears (I have more sympathy with this position) will argue that it's impossible to know the magnitude of the legal risk, and the company's operational performance continues to be underwhelming anyway.

Revenue growth has been lackluster in recent years, and earnings growth has followed suit. For the bears, there's no reason to buy the stock until management can demonstrate some margin expansion and revenue growth.

For investors who only like investing in high-quality companies, 3M is worth avoiding, but it might interest value-oriented investors.