The Daily Crux: OK Tom, the last time we talked you recommended buying only the absolute safest companies because most stocks were too expensive. Well, they've become even more expensive now… But we just heard you're recommending blue-chip stocks to your readers.

Have you changed your mind? Are you bullish on stocks now?

Tom Dyson: Well, I can see why you'd think that, but the short answer is no – I haven't changed my mind.

I'm still quite bearish on stocks – but I have been recommending blue chips to my readers. This may sound counterintuitive, but I've got an interesting story that can help explain.

Earlier this month, I came across an unpublished memo from Sir John Templeton that just recently resurfaced. For those who don't know, Templeton was one of the original titans of Wall Street and the mutual fund industry. He passed away in 2008, but prior to his death, Templeton wrote a fascinating memo that basically was extremely pessimistic on the future of the U.S. and the whole world economy.

He had intended for the memo to be published, but it was lost after his passing until it was recently discovered in a filing cabinet.

In the memo, Templeton used phrases like "financial chaos," "the peak of prosperity is behind us," and "there have never been more dangers in my entire life than there are right now." I believe he lived into his 80s, so that statement goes back to the era of Great Depression.

So it was a bearish statement with a lot of gloomy predictions. And I thought it was interesting because not only were many of Templeton's predictions on target, but they also agree with much of what I've been telling my readers. So it really caught my attention.

Templeton saw big problems because there was just so much debt in our system – more than any other time in history. He also saw extreme overcapacity in almost every industry in the world. He thought this combination was a recipe for some very nasty problems.

He also predicted governments would aggressively try to bail out and fix these problems – especially the companies that made all these bad loans and held all these bad debts.

All that has happened is much like Templeton predicted in 2005 in this memo.

Another thing he talked about was that there's so much liquidity in the world that yields on money markets, bank accounts, cash investments, and bonds would be extremely low.

With the likelihood that governments would be printing money, bailing out, and basically devaluing their currencies, Templeton thought it would be almost impossible to protect oneself. He believed it would be very hard to find a safe place to keep money that offered a meaningful return.

Crux: That sounds a lot like what you've been saying in your 12% Letter

Dyson: Absolutely. This is basically the same story that I've been telling my readers for months now.

And my approach has been to encourage my readers to invest in only the safest cash and cash-like investments, but I've had to work really hard to find cash-like investments that actually pay decent yields.

For instance, I've found some stocks that have huge cash balances, which basically makes them trade kind of like cash. They have very low volatility in their stock prices - even during 2008 these companies were rock solid and didn't see the big declines most of the market did.

Meanwhile, they pay solid yields. One I can think of pays an 8% dividend. Another pays a 4% dividend that's been rising every year and is likely to continue to rise.

So those were some of my favorite ideas to play what is likely to be a lot of financial chaos still to come.

Crux: Did Templeton have any thoughts on what might be safe? Did he provide any recommendations?

Dyson: He did, but they weren't what you might expect. His favorite investment to handle this financial chaos was not gold, not cash, not bonds. Templeton actually liked the stock market, which I found quite incredible.

But he didn't like just any stocks – in his memo he mentioned two specific characteristics.

He liked stocks with large profit margins that are likely to continue to have large profit margins, and stocks that sell their products to many different markets around the world.

I interpret that to mean that he thought the best place to be is in the very best quality blue-chip stocks. I would imagine he was talking about companies like Coca-Cola, Johnson & Johnson, Procter & Gamble, ExxonMobil, Intel, IBM, and Microsoft.

These are companies that have large profit margins, low debt, tons of cash, they're extremely well managed, and they do business all around the world with very entrenched market positions.

So that was something I found really interesting. This idea that in crisis, you want to have your money in stocks… it's something that not many people would think of naturally.

But I really like the idea. It offers a different approach to protecting your assets. You protect yourself from whatever shenanigans the government does with its currency, you protect yourself from bankruptcies and whatever crises hit the banks and the lending companies and the consumers, and you diversify yourself away from the USA – which may not be the epicenter of the crisis, but it's not far away.

So I really like the idea of owning blue-chip stocks, but I have major reservations about recommending them now.

As we're all aware, the stock market has risen substantially in the last year. It's been one of the best stock market rallies in history. And of course, blue-chip stocks have also risen a lot. In fact, readers who were with me during 2008 and early 2009 own many of the stocks I mentioned. We bought them in the heart of the crisis and we're showing fantastic gains on all of them.

But I see the potential for a significant short-term correction and maybe something more, so I'm not advising readers to take new positions in these stocks now. They've run up too much and are vulnerable to a pullback.

So where does that leave us? How can we get exposure to the stocks Templeton mentioned without putting our money at risk?

Fortunately, there's a way to do just that.

There's a dividend strategy that many investors aren't aware of that allows you to slowly build positions in the world's best blue-chip stocks.

Of course, you could just buy a few shares on a regular basis through your broker, but you'll end up spending a small fortune on commissions that'll eat up a big chunk of your potential return.

The great thing about this strategy is you can avoid the commissions and fees that you normally pay to buy these stocks. In fact, many times you can actually buy these stocks for less than the current market price. These savings can really add up over time.

So you're getting exposure to the best companies in the world. But you're building it slowly, so it's not as important that stocks are expensive today, and you're not at great risk from a big correction in the market.

In fact, corrections are actually a benefit with this strategy, because it allows you to take advantage of what's known as “dollar-cost averaging,” meaning you'll be lowering the average cost of the stock you own.

So over time you're able to build up enormous positions in companies like Templeton recommended – with fantastic profit margins that raise their dividends every single year, and have done so for decades and will continue for decades.

Obviously, this only works if you're a long-term investor. But it's one of the best ways to take advantage of the compounding effect of dividends, and is probably the surest way to build a fortune in stocks.

Templeton expected this financial crisis to last many years. Because of the nature of this strategy, you're likely to come out on the other side of these problems with a big portfolio of the best stocks in the world, without putting this money at undue risk.

Crux: That sounds great, but how does it fit in with your other recommendations?

Dyson: Well, I still recommend keeping a large portion of your investment funds – say 70% or so – in the very safest things, like cash and the cash-like investments I mentioned earlier.

Then I'd put about 25% into a basket of the safe dividend stocks that I've been recommending that pay an average of 9% or so.

That leaves about 5% for speculating – short positions, small aggressive trades, and those kinds of things.

Finally, I recommend a portion of your income from your dividend portfolio or your job go into blue chips. This can be as much or as little as you feel comfortable with… the most important thing is just to start building a position. And using this dividend strategy is the easiest and most inexpensive way I know to do it.

Crux: Sounds good, Tom. Thanks for talking with us.

Dyson: Thank you. My pleasure.

source Email.

Posted by Mr Thx Tuesday, March 30, 2010


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