This is the second of three articles where I explain the why, what and how of my Compound Income investing. In this part I will look at the other factors I consider in addition to yield which was covered in why.

Value

Even though yield covers this to to a certain extent as often higher yielding shares tend to offer value as they have got onto a high yield by being beaten up or neglected. I do however like to check other vauation metrics when considering yield shares, to ensure that I am buying value and not just an expensive high yielder.

No discussion of value would be complete without a mention of Benjamin Graham and his focus on buying cheap Assets or Net Nets as he called them. Other studies of returns to value have also found price to book value to be a good predictor. However, I have always struggled to find many Companies meeting Graham's deep value criteria and while I wouldn't put people off using price to book, I consider it but I prefer to focus on profit, earnings and dividend based measures of value. Nevertheless in certain circumstances I use price to book such as for asset plays like property and investment trusts and for certain financials like banks.

So I consider the basic P/E as buying low P/E stocks is also generally a good idea as shown in the What works research I highlighted last time. The main issue with P/E's is that it does not take the capital structure into account. So sometimes stocks are on cheap P/E's because they are highly geared (debt) which can be both good and bad. I therefore prefer Enterprise value (EV) measures that take the full capital structure including debt into account. While there is probably no one best value measure it seems from research that EV/EBITDA comes close, so I tend to pay most attention to gross profit to asset measures and earnings yield type calculations where EBIT or EBITDA is compared to EV. I then factor these in alongside yield in my screening. However, it can also be argued that a composite value rank composed of several value factors can do an equally good job. See the research link above and the book Quantitative Value for more details on comparisons of value…

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