The Fed just lowered interest rates. My Top High Yielding Dividends to Buy Now.

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

Here’s how the Fed’s decision could benefit the energy pipeline company Kinder Morgan (KMI 0.51%) and why high-yielding dividend stocks are worth buying now.

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Room for further balance sheet improvements

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

PBA Data Debt to Equity (Quarterly) by YCharts.

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

Despite the improvements, Kinder Morgan still has a high interest expense. Its trailing 12-month interest expense is $1.85 billion. For context, Kinder Morgan spent $2.5 billion on capital expenditures and $2.54 billion on dividends over the past 12 months.

The company has kept a tight lid on expenses as it prioritizes free cash flow generation, a 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 flow from those assets. When discounted to account for capital costs, future cash flows should exceed the cost of the investment. A lower cost of capital or a greater amount of future cash flows may benefit Kinder Morgan and help justify expensive projects.

Infrastructure is needed to support growing US oil and gas production. But Kinder Morgan no longer depends only on domestic consumption.

Liquefied natural gas (LNG) is a major tailwind for the industry. It involves transporting natural gas from production areas to liquefaction facilities at export terminals, which cool and condense the gas into a liquid state that allows for overseas transport. The US is now one of the largest exporters of LNG in the world. A global market for LNG expands the pool of buyers for the natural gas that Kinder Morgan transports.

Another area of ​​growth is that of biofuels. Infrastructure will be needed to support the increased demand for natural gas, diesel and other fuels produced from renewable feedstocks such as seed oils, sugarcane, corn, algae, food waste, cow manure, sewage and landfill gases.

Natural gas is mainly used for power generation. According to 2021 Energy Department data, 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 for blending natural gas and/or biofuels with diesel or gasoline to reduce emissions.

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

In conclusion, Kinder Morgan has plenty of ways to put capital to work. Lower interest rates make it less expensive to explore these opportunities.

A powerhouse with passive income

There are tons of ways to generate passive income, from T-bills to high-yield savings accounts and more. High-yielding dividend stocks are less attractive when the risk-free rate is higher. But 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 rate of 3.7%. It’s also higher than the 3% return investors can get from an exchange-traded fund (ETF) like Vanguard Energy ETF or just the yield of 1.3% from S&P 500.

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

Shifting into a new growth spurt

Higher U.S. production and demand for the fuels and products that Kinder Morgan manages represents a compelling growth opportunity for the company. However, it is critical that Kinder Morgan does not overinvest itself at the expense of its capital commitments to shareholders.

Investors should watch to see if the data center opportunity is the real deal, monitor progress on the energy transition and low-carbon fuels, and assess how Kinder Morgan balances those opportunities with the need for more infrastructure LNG.

In conclusion, Kinder Morgan stands out as a solid dividend stock for generating passive income, but it also has plenty of ways to grow its business, increase free cash flow, and reward shareholders in a variety of ways. ways.