At the time of this writing, the shares of the oil giant ExxonMobil trade at around $100 per share. The company pumps out $7.64 in total profits, and pays out $2.52 in dividends. When you buy a stock, there are three ways to turn a profit (again using Exxon as the illustrative example):
1. Valuation. This simply means that the investor community is willing to pay more for each $1 of profit than they were before. This is what has happened to ExxonMobil over the past three months. In the middle of October, Exxon was trading at $85 and pumping out roughly the same $7.64 in profits. Exxon is not 17% more profitable here in January 2014 than it was in October 2013, but rather, investors are valuing Exxon’s profits at a 17% higher rate.