The Fed just cut interest rates. My top high dividend yield stocks to buy now.

The Federal Reserve cut interest rates last week and could cut rates further in the coming months. Lower interest rates reduce the cost of capital and can increase return on investment on capital-intensive projects.

Here's how the Fed's move could benefit the energy pipeline company Children Morgan (KMI 1.55%) and why it's worth buying the high-yield dividend stock now.

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Room for further balance sheet improvements

Since the oil and gas downturn in 2014 and 2015, Kinder Morgan has worked hard to repair its balance sheet and restore investor confidence in its dividend. Over the past nine years, the company has reduced its total long-term net debt by 29% and lowered its leverage ratio. As you can see in the chart below, Kinder Morgan's debt-to-capital (D/C) ratio is now just 51%, among the lowest in its peer group.

PBA Debt To Capital (quarterly) data from YCharts.

The D/C ratio is a company's total debt divided by its total debt plus total equity. The lower the D/C ratio, the less debt dependent the company's capital structure is.

Despite the improvements, Kinder Morgan still has a high interest expense. Interest expense for the trailing 12 months is $1.85 billion. By comparison, Kinder Morgan spent $2.5 billion on capital expenditures and $2.54 billion on dividends in the last 12 months.

The company has kept its expenses tightly under control as it prioritizes free cash flow generation, low leverage ratio and dividend growth. Lower interest rates could help Kinder Morgan refinance existing debt or take on new debt at a lower interest rate.

Accelerating capital investment

At its core, Kinder Morgan's business model involves building and operating infrastructure assets – such as pipelines, terminals and storage facilities – and then generating future cash flows from those assets. When discounting to account for the cost of capital, future cash flows should exceed the investment costs. Lower capital costs or higher future cash flows can benefit Kinder Morgan and help justify expensive projects.

Infrastructure is needed to support growing oil and gas production in the United States. But Kinder Morgan no longer relies solely on domestic consumption.

Liquefied natural gas (LNG) is a key tailwind for the industry. This involves the transportation of natural gas from production areas to liquefaction plants at export terminals, which cool and condense the gas into a liquid state that enables transportation overseas. The USA is now one of the largest LNG exporters in the world. A global market for LNG expands the pool of buyers for the natural gas transported by Kinder Morgan.

Another growth area is biofuels. Infrastructure is needed to meet the increasing demand for natural gas, diesel and other fuels made from renewable raw materials such as seed oils, sugar cane, corn, algae, food waste, cow manure, wastewater and landfill gas.

Natural gas is mainly used to generate electricity. According to 2021 data from the Department of Energy, natural gas and biofuels accounted for less than 10% of the transportation industry's energy mix. Compressed natural gas can be used for long-distance transportation or as a blend of natural gas and/or biofuels with diesel or gasoline to reduce emissions.

Like many other midstream companies, Kinder Morgan has recognized the potential role that natural gas can play in powering energy-intensive data centers. Artificial intelligence (AI) is driving electricity demand, which could open up another growth path for Kinder Morgan.

In summary, Kinder Morgan has many ways to deploy capital. Lower interest rates make it more cost-effective to explore these options.

A passive income powerhouse

There are many ways to generate passive income, from Treasury bills to high-interest savings accounts and more. High-yield dividend stocks are less attractive when the risk-free rate is higher. However, when the risk-free rate is lower, there is more incentive to invest in dividend stocks.

Kinder Morgan has a yield of 5.3%, which is higher than the 10-year Treasury note rate of 3.7%. It's also higher than the 3% return that investors can earn with an exchange-traded fund (ETF) like that Vanguard Energy ETF or the mere return of 1.3% from the S&P 500.

Kinder Morgan's recent dividend increases have been relatively small, but the company remains committed to gradually increasing the dividend over time.

Shift into a new growth gear

Increased U.S. production and demand for the fuels and products processed by Kinder Morgan represent a compelling growth opportunity for the company. However, it is paramount that Kinder Morgan does not over-invest at the expense of its capital commitments to shareholders.

Investors should pay attention to whether the data center opportunity is real, monitor progress in the energy transition and low-carbon fuels, and assess how Kinder Morgan balances these opportunities with the need for more LNG infrastructure.

In summary, Kinder Morgan is a solid dividend stock for passive income generation, but also offers numerous opportunities to grow its business, increase free cash flow, and reward shareholders in a variety of ways.