Tech stocks keep swinging, so high-dividend names can only play it safe? Understanding two stock-picking approaches: dividend yield and free cash flow

Since the start of this year, US tech stocks have seen repeated sharp swings, and market concerns over AI valuations and capital expenditure are still brewing. Beyond repeatedly switching between "chasing tech" and "sticking with dividends," investors can also look at things from a different angle: whether a company can sustainably generate cash and return it to shareholders.

This article explains the meaning, usage, and limitations of two stock-selection metrics—dividend yield and free cash flow—and uses the CSOP FTSE East-West Equity Select ETF (03441.HK) as an example to break down the "Hong Kong high dividend + US free cash flow" barbell allocation approach. According to issuer data, as of September 30, 2026, the index tracked by this product had a year-to-date total return of approximately 30.8%, with a maximum drawdown of approximately 8% over the past year.

1. Avoiding Pullbacks Is Harder Than It Seems

In July of this year, the Nasdaq 100 Index fell about 11% within a single month, entering a technical correction. For investors with concentrated holdings in tech stocks, such pullbacks are directly reflected in their accounts.

The reason lies in portfolio structure: if holdings are concentrated in a single market or a single style, the portfolio's performance essentially depends on the trajectory of that one type of asset. When tech stocks rise, the portfolio shines; when they pull back, it comes under pressure in tandem.

Switching between different styles may seem like a way to avoid pullbacks, but it is quite difficult in practice. Investors need to judge both when to exit and when to re-enter; a misjudgment could mean missing the rebound, and frequent trading also increases costs.

Rather than predicting when styles will rotate, it may be more useful to first understand where the returns of different assets come from. Below, we start with two metrics that measure a company's ability to generate cash.

2. Dividend Yield: How Much a Company Pays Out

What Is Dividend Yield?

Dividend yield is the ratio of the cash dividend a company pays per share to its current share price, used to measure how much cash return an investor might receive each year after buying at the current price.

For example, if a stock trades at HK$50 and paid HK$2.5 per share in dividends over the past year, the dividend yield is 5%.

Why Is Dividend Yield Commonly Used for Stock Selection in Hong Kong?

In the Hong Kong market, companies in sectors such as utilities, banking, infrastructure, and transportation have relatively mature businesses, with limited reinvestment needed for expansion, and typically distribute a larger proportion of profits to shareholders as cash dividends. Therefore, dividend yield is a commonly used metric to gauge such companies' ability to return capital to shareholders.

Screening by dividend yield also has a structural feature: when share prices fall, dividend yields rise, making such stocks more likely to be included in the portfolio; after share prices rise, dividend yields decline, and they may be removed. To some extent, this creates a "buy low, sell high" effect.

Common Pitfalls of High Dividends

A high dividend yield does not necessarily mean high investment value. Investors should watch for:

• "High dividend" caused by a sharp price drop: If the rise in dividend yield is mainly due to a sharp fall in share price, it may reflect deteriorating business fundamentals, and future dividends may not be sustained.
• Whether dividends are sustainable: Check the payout ratio (dividends as a proportion of profits) and dividend history. Companies whose dividends exceed profits or cash flow for an extended period may struggle to sustain them.
• Industry cycles: Some cyclical industries pay more dividends at peak prosperity, and dividends may decline significantly when the industry weakens.

3. Free Cash Flow: How Much Cash a Company Can Freely Deploy

What Is Free Cash Flow?

Free cash flow is the cash a company can freely deploy after paying operating expenses and making necessary investments (mainly capital expenditure).

For example, if a company generates US$10 billion in cash from operating activities in a year and spends US$3 billion on capital expenditure such as building factories and buying equipment, its free cash flow is US$7 billion. This money can be used for dividends, share buybacks, debt repayment, or reinvestment.

Compared with accounting profit, free cash flow reflects the cash a company actually receives and can deploy, and is less affected by accounting treatment, so it is often used to measure earnings quality.

What Is Free Cash Flow Yield?

Free cash flow yield is the ratio of a company's free cash flow to its market capitalization. It can be understood as: at the current share price, how much deployable cash the company generates each year. The logic is similar to dividend yield, but it measures how much money a company "can put on the table," not just how much it "actually paid out."

Why Is Free Cash Flow Commonly Used for Stock Selection in the US?

US companies have more diverse ways of returning capital to shareholders. In addition to dividends, many companies more often return capital through share buybacks. Looking only at dividend yield may miss companies that pay modest dividends but consistently conduct large-scale buybacks. Free cash flow can more comprehensively reflect a company's ability to return capital to shareholders.

In the Current Market: How Capital Expenditure Affects Free Cash Flow

One topic the market has focused on this year is the continued rise in capital expenditure among AI-related companies. From the calculation of free cash flow, it is clear that the larger the capital expenditure, the lower the free cash flow in the same period.

This does not mean that high-investment companies are bad; capital expenditure may bring growth in the future. But for stock-selection methods based on free cash flow, companies with significantly increased capital expenditure may see their rankings decline. Understanding this helps explain the performance differences of such strategies across different market conditions.

Limitations of Free Cash Flow

• A single year may be distorted: Concentrated investment or collection of receivables in a given year may make that year's free cash flow noticeably higher or lower.
• Not applicable to growth-stage companies: Companies in rapid expansion may have low or even negative free cash flow, but this does not necessarily indicate poor operations.
• Not equal to shareholder returns: A company with high free cash flow may use the money for acquisitions or retain cash, and may not return all of it to shareholders.

4. Dividend Yield vs. Free Cash Flow

Both metrics address the same question: whether a company can sustainably generate cash and return it to shareholders. The difference lies in the angle of observation.

5. Putting the Two Types of Assets Together: The "Barbell" Allocation Approach

What Is Barbell Allocation?

Barbell allocation means placing two types of assets with quite different styles in the same portfolio, like the two ends of a barbell: one end is more defensive, such as high-dividend assets with stable payouts; the other end is more offensive, such as companies with growth potential.

The two types of assets are driven by different factors, and their trajectories are not fully synchronized. When one type of asset pulls back, the other may perform relatively steadily, and the overall portfolio volatility has the potential to be lower than holding a single style alone.

This allocation also involves trade-offs: when one type of asset surges, only part of the portfolio's capital participates, and performance may lag behind concentrated holdings in that asset.

How to Implement It?

Investors can explore two approaches:

• Build it yourself: Separately buy high-dividend stocks or related ETFs, as well as large US companies or related ETFs, decide the proportions yourself, and rebalance regularly. This offers greater flexibility but requires your own screening, monitoring, and adjustments.
• Use a rules-based ETF: Some ETFs already place the two types of assets in the same portfolio according to established rules and adjust constituents periodically. Investors do not need to manage the proportions themselves but must accept the product's established rules.

Example: A Rules-Based Combination of Hong Kong High Dividends and US Free Cash Flow

Take the CSOP FTSE East-West Equity Select ETF (03441.HK) as an example. The index tracked by this product allocates approximately 60% to locally listed Hong Kong high-dividend stocks, screened by dividend yield, mainly in sectors such as utilities, financials, industrials, and real estate; and approximately 40% to large US companies, excluding companies with negative free cash flow, lower quality, or higher volatility from the Russell 1000 Index constituents, then selecting 100 companies with better free cash flow performance. The weights of the two markets are determined by the index rules and are not actively adjusted based on market judgment.

In terms of returns, according to issuer data, as of September 30, 2026, the index had a year-to-date return of approximately 30.8% and a return of approximately 36.7% over the past year. At the product level, 03441 has risen more than 30% cumulatively since being included in ETF Connect in November 2025, ranking first in return among all southbound Connect ETFs.

According to issuer data, as of September 30, 2026, the index's maximum drawdown over the past year was approximately 8%, lower than the Nasdaq 100 Index, the Hang Seng Index, and the S&P 500 Index over the same period, indicating relatively low historical drawdown. It should be noted that this is the index's past performance and does not represent the product's future performance; actual fund returns are also affected by factors such as fees and tracking error.

6. Before Investing, Consider the Following Points

• Do I understand the screening criteria of the chosen assets? Whether screened by dividend yield or free cash flow, the companies selected and their performance across different market conditions may differ greatly.
• Do my existing holdings already overlap? If you already hold a significant amount of high-dividend stocks or large US stocks, adding similar assets may increase concentration.
• Can I accept relative underperformance in rising markets? Diversified allocation, while reducing volatility, may also reduce participation in strong markets.
• What are the product's actual trading conditions? Compare management fees, bid-ask spreads, trading volume, tracking performance, and dividend arrangements, and avoid making decisions based solely on recent gains.

Summary

High-dividend assets are often viewed as defensive tools, while tech stocks are often viewed as sources of growth. But from the perspective of "whether a company can sustainably generate cash," the two can be understood through similar logic: dividend yield measures how much a company actually pays out, while free cash flow measures how much a company can put on the table.

Putting the two types of assets in the same portfolio has the potential to reduce reliance on a single market or style, but it also means lower participation when a certain type of asset is surging. At the same time, risks such as industry concentration, interest rate changes, exchange rates, and market volatility remain.

Whether building a portfolio yourself or using a rules-based product, you should first understand the screening criteria, risks, and costs, and then judge whether it fits your investment objectives.

(The product information related to 03441.HK in this article is provided by CSOP Asset Management Limited.)

Risk disclosure: This article is for general market information and investor education only and does not constitute investment advice, nor is it an offer, solicitation, or recommendation to buy or sell any securities or funds. Past performance does not represent future performance. Investment in securities and ETFs may result in loss of principal. Investors should read the relevant product documents and fully understand their risks before investing. The products and services mentioned herein may not be recognized or registered in all jurisdictions and are not provided to persons in jurisdictions where the relevant laws prohibit or restrict them, and the applicable laws of the relevant location shall prevail.