What’s Up With All These Rewards Cards?

In this week's episode of Industry Focus: Financials, Jason Moser has Dan Kline on to talk about rewards cards, Wells Fargo's (WFC 1.24%) new CEO, and more. Wells Fargo's CEO hunt is over. Is Charles Scharf the right man for the (massively challenging) job?

Meanwhile, we're approaching what feels like critical mass for rewards cards. What does it mean for companies? What about consumers? How does Apple's (AAPL 0.51%) Card fit into the picture? Plus, the guys answer some listener questions about healthcare REITs, share some stocks on their radar, and blast out some stocks that listeners bought and why they're so excited about them. Tune in to hear more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Sept. 30, 2019.

Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Monday, September 30th. I'm your host, Jason Moser. Joining me in the studio today via the magic of Skype, we have Mr. Dan Kline this week. Dan, how's everything going?

Dan Kline: Things are good. How are you, Jason?

Moser: I'm doing well. We had a big member event here last week that took a lot out of us. Had a nice weekend to just relax, take it easy, recover, get back in here full throttle. Last day of the quarter. Brand new quarter starts tomorrow, Dan.

Kline: I saw the pictures from the event last week. I'd actually thought about coming down, but it was my 19th anniversary, so I sort of wanted to invest in having a 20th anniversary. Figured it was best to not come. But man, looks like we put on a good show.

Moser: I think that was probably a wise call. Always invest in the marriage first. Everything else is secondary.

We're going to tap into a few things here today. We're going to talk about the payments space and these credit cards we see coming out here, and the Apple Card as well. Dan, you're going to go into some of the different rewards cards, compare them to Apple Card, and examine what that space is looking like today and the opportunities that are out there for some of these different card companies. We are going to offer up a few more of the "what was the last stock you bought and why" tweets. We have some more great listener tweets out there, telling us about the stocks they're buying and why they're buying them. We, of course, will have one to watch for you at the end of the show.

But we're starting today's show off with the news item that came out late last week -- Wells Fargo has a new CEO, Dan. Charles Scharf, the head of Bank of New York Mellon. Used to work at Visa. He is now going to be running the show at Wells Fargo. Tell me, what was your reaction when you first read about this?

Kline: To be fair, former CEO at Visa. It wasn't like he was just customer service. He was important.

The challenge with this is, he seems like a good pick, but this job has been open six months. Did a headhunter reach out to you on this one?

It felt like no one wanted this job, and there's a logical reason nobody wanted this job. This is a very damaged bank that's under some restrictions on the size of the assets it can own. And this is often the case -- in professional football, if you're trying to get a coach to take over a bad team, why would someone leave a good situation at, say, a college for a bad situation in the pros? They talked to a lot of people, and on paper, this seems like a textbook good-but-uninspired pick; what you don't really see is, this is an outsider to a company -- and they had to go outside. Anybody inside was somewhat tainted. But can he come in and really change a culture? The problem at Wells Fargo seems to be at the executive level. I don't know if [Wells] is your bank. They're my bank. I find them a wonderful retail experience as a bank that was just a little bit rotten on the top.

Moser: They're not my bank. They've owned a mortgage or two that we had at some point down the line or whatever. We set up accounts with Bank of America a long time ago when we were traveling. The reason was primarily because they had the best online banking operation at the time, when online banking was really just getting started. To be fair, I did work at Bank of America for a couple of years. I understood these cultural problems. Some of these problems with the fake accounts, these benchmarks, employees feeling pressured to reach certain metrics -- that was not just a Wells Fargo thing. I think that's pervasive in a lot of industries, particularly the bigger a company gets, because it's just more difficult to manage. So I wasn't terribly surprised when I saw all of that stuff happening with Wells Fargo. But then, to see how many layers ... you kept on peeling off a new layer of total disregard for either consumers or investors or both. It was clearly stuff that was going on for a long time. To your point, he's got a major task ahead in developing a new culture that could make a lot of people feel good about the bank where they're working or the bank that they use.

Kline: Yeah. And he gave some very measured statements, talking about how, "we're under some restrictions, we have to peel it back, we have to figure it out." I think what got them into this trouble in the first place is managing to the quarterly results. You're building bonuses, you're structuring everything so you peak every quarter. And one of the things we've seen with a lot of publicly traded companies is, if you're big enough, you should say, "That's not our goal. Our goal is to be the best customer service company we can, to retain people long term, to build assets through building trust." And this seems like a steady hand. I'm not sure this is the guy who leads Wells Fargo for 20 years, but I think this is the industry veteran, nobody's going to be too scared of him. He's not necessarily going to come in and bring in all his own people. There's been a ton of upheaval at Wells Fargo. I think he can just sort of say, "Hey, an adult is in the room. I don't know your culture. I'm going to listen, but we're also going to break things and change things." He seems like someone who could do, that the industry respects. And if you've run Visa, you've worked through all these levels of regulatory issues, and working with other banks, and dealing with technology.

Again, he might not have been the first choice. He might not have been the 50th choice, frankly. But he does seem like a good pick.

Moser: To your point about going outside the organization, I agree with you, they absolutely needed to go outside. Frankly, given the situation that Tim Sloan was put into, I was really surprised to see that they didn't go outside from the very beginning. It didn't take a genius to realize that Tim Sloan was part of the team that was part of the problem to begin with.

Kline: I understand that reticence, though. You work at The Motley Fool. I'm a writer for The Motley Fool. If, all of a sudden, we brought in a chief operating officer who was from outside the company, and it was someone who really wanted to change a lot of things, there'd be big pushback. We have a culture, a way of doing things. On the other hand, if you're someplace where everything is wrong -- I mean, billions of dollars in fines, millions of fake accounts, an incentive structure built around cheating, basically -- it was hard, but I understand why they didn't in the first place. Tim Sloan was someone who had been there. While he was part of it, he wasn't one of the ringleaders. And it felt logical to give him a chance. But the reality is, it's almost impossible to come back from that kind of even adjacent taint. This sets the debt clear, and it puts Wells Fargo on the path so every conversation about Wells Fargo doesn't have to be about this.

Moser: Real quick before we wrap up here -- it looks like he is going to be telecommuting. Wells Fargo headquarters are in San Francisco, and he's in New York.

Kline: Yeah, that's a giant, giant red flag! He literally could have been waving a flag at the press conference! Look, I'm a big fan of telecommuting for mid-level workers. Your HR assistant can telecommute. Your fifth-ranking person, an accountant, or a coder. They don't need to be at headquarters. I know he said he's going to be there a lot, but I'm sorry, you're the CEO of a major bank. If he said, "I'm going to be there for two years, then maybe I'll start telecommuting," that scares me. The history of CEOs not being in the office is not very good. It's very hard to take over an organization where all of the people who didn't get this job internally, they're there. They're going to have their hands on the levers of power. That's very hard to manage when you're not in the office. Look, I hope he means he's there four days a week, and he's flying home for the weekend. That's fine. But if he thinks he can do this job on Slack, that's probably not good when you have to upend ... I don't know how many years, but Tim Sloan was there for 31 years, so longer than 31 years, level of culture.

Moser: We shall see. OK, moving on.

We're seeing a lot of companies out there today trying to gain more and more in the way of customer loyalty by linking us to a type of rewards card, whether it's Walmart or whether it's Target. Maybe you're an Amazon Prime customer and you've got one of those Prime Visas like I've got. It's all about the rewards cards today. Now, with Apple Card coming out -- if I recall correctly here, Dan, you actually have Apple Card now.

Kline: I do. And I honestly did it because I needed a new MacBook. I've never purchased a new computer, I've always purchased an Apple refurbish. I'd never spent $1,000 on a computer before. So that seemed like a really good time to get 3% cash back, and it's immediate cash back. But Apple made the process so ridiculously easy. You just enter a few things on your iPhone, and then it not only tells you all of the different terms, gives you the opportunity to accept or not accept, you can use it right away. In the same 15 minutes, I applied for the card, got the card, ordered the computer I wanted, and then, maybe 10 days later, the actual card -- which you don't need. It's like the card they give you at Starbucks to show that you're a Gold member. I don't think that's a thing anymore, but it used to be.

Moser: I remember.

Kline: It's almost a status symbol because there's really no scenario where you wouldn't use it through your phone. It's a very clever interface. It's a lot of customer-friendly stuff, like not charging you if you miss a payment, it reminds you, you can make multiple payments in a month if you want to keep your interest charges down. It shows you everything right in the Apple Wallet. For me, that was a useful card.

On the other hand, this whole soup of cards has become very confusing. Like you, I have an Amazon card that is only in my Amazon account. I don't even know where the physical card is. It is a very good cash-back program. I believe it's 2% on everything. There might be some other perks to it. That card, I have the problem with -- when I apply it, I only asked for a low limit. So sometimes, because I buy from Amazon so much, I find myself going, "Oh God, I haven't paid that card off in two weeks, and now I've spent $2,000 on Amazon in the last two weeks. I have to go pay that bill." As a consumer, it's become very tricky in that the days where you could just have one card with a high limit, a couple of backup cards -- now you have to be very strategic, and look where you spend your money, and which card gives you the most bang for your buck. If you're a regular digital Walmart customer, you probably want the Walmart card. It's pegged toward driving people to buy for delivery or online orders from Walmart. To me, that makes absolutely no sense, because they're incentivizing behavior that costs them more money to fulfill. I just saw one of their retail heads speak, and he made it very clear that they will not charge higher prices for digital or delivered orders. They do charge a delivery fee, or you could sign up for an unlimited delivery program. So, it's becoming very tricky, and it's ever-changing. Apple actually inched up some of its non-Apple rewards because people weren't happy with that stuff. So you not only have to look at the immediate fine print; you kind of have to check in with your cards every 60 or 90 days.

Moser: Oh, I think that's absolutely right. That was the point I was going to make. It really is all about the rewards for most of these cards. You look at two things -- rewards, and do they charge any kind of a fee. In today's day and age, you really can't get away with charging a fee very often, unless you're American Express. Somehow they've continued to do it, and I've continued to keep my American Express card, because I do find the utility -- particularly when I'm traveling, the American Express card has been very helpful. The thing is, I've had it for 10 or 15 years. At that point, it probably makes sense just to have it open from a credit score perspective. But clearly, most of my spending is done on that Amazon card. And you're right, you have to check those rewards every 60 or 90 days because they do change.

I think longer term, though, they really do all gather together. Any of these companies can get out there and sweeten the pot a little bit to make their card look a little bit better.

Kline: They can. You really need to look at how you shop. Because I buy so much on Amazon, it makes sense to have the Amazon program. The new Target loyalty program isn't credit card-based, but it layers on top of their existing credit cards. You get an added 1% back, and all you have to do is sign up. Sometimes it is a hassle to manage these things. Remembering, "OK, I'm booking travel. Use the card that gets the best travel reward," or, "This card is giving 4%, but it's only for the next 60 days, so I should put the purchase there." You can't just grab what's in your wallet. Though, it does make sense sometimes to just have a highly rated card that's good overall. You don't want to have to google things when you're stopping to get gas, to figure out which card has 2%, which has 3%.

I will go back to what you said about American Express only because Matt Frankel, who is often the guest on this show, made the case for me why I should spend $550 a year to get the card that allows me into the airport lounge.

Moser: Is that the Platinum card?

Kline: I don't know which one it is.

Moser: It must be Platinum.

Kline: He was sending me pictures from one of the New York airports. It's a free dinner, free drinks, and it was a very luxurious-looking dinner. You get a TSA precheck, you get the money back for that. He laid out to me the argument of, you're spending this money anyway. You could get all this stuff included. And because you fly out of Las Vegas, two, three, maybe four times a year, if you timed your flights to use this lounge and have a meal there, you actually could come out ahead on that $550. So, don't dismiss something just because there's a fee; but really look at what you get for that fee. If what you get for that fee is a service like, say, Clear, which I love and use at airports all the time, if that's free, well, that knocks off whatever you would have paid for Clear. If you get a free Prime membership or free Netflix, whatever it is, factor in every perk. Know which card you should use, say, when you get your rental car, because it fills in the insurance gap. Know which card to use when you're buying something on eBay and might get taken advantage of and need to go after somebody. You have to do your homework more so than ever because every company wants you to shop more there, and if they have to kick 2% or 3%, even 5% your way to do that, they're being very aggressive about it.

Moser: It's a complicated world, Dan. I just try to keep it simple. Like my investing strategy, just find something good, latch onto it, and hang on for a while. Maybe that's what I'll just keep doing.

Kline: You mean you don't have a spreadsheet for which credit cards you use in each place?

Moser: [laughs] Nope. I do not, and the chances of that happening are slim to none. And slim, as my dad would say, has just left town. Moving on.

Let's jump into the Twitter sphere. We have a tweet from Stuart Simpson @therealmrwillow from about a week ago. He'd asked a question on Twitter that felt like deserved more than just a one-tweet answer. It was about a dividend video that we did. We did a live-stream YouTube video a week ago on dividend investing. I called out Microsoft (MSFT 0.46%) as a dividend stock that I liked for the next decade, or something like that. Stuart asked a good question here. He says, "The thing I want to know is, why recommend Microsoft for a 1.37% dividend yield when a company like OHI, or Omega Healthcare Investors, has nearly doubled since February 2018 and offers a 7.51% dividend? There are lots of companies that offer a 5% plus dividend and I never see them recced."

Stuart, you're right. There are a lot of companies out there that offer some pretty sweet looking dividends. But it is about more than just that yield, which was what we were trying to talk about in that studio there, that day of the live stream. When you hear this question, Dan, what do you think?

Kline: It's a bit like dating. We're both married. You might meet someone in your dating days, you're like, "Oh my god, she has the prettiest smile ever." And for a date or two, that's going to carry you through the relationship. But as you get to know her, if she has a terrible personality, you're probably not going to keep dating her because her smile is good. When you look at a company, you really have to look at all the factors. Why Microsoft? Because they have switched to a sustainable subscription model, and they've become a revolutionary company, which is very hard to do when you're a legacy company. You have to look at the entire business. Do you believe in its sustainability? A dividend is often a way to distract you from underlying issues in the company. Again, I don't know this particular stock. It might be a fabulous buy that would check all the boxes. But you really have to look at the whole picture. A dividend might be to keep a stock from crashing while the company is experiencing other problems. That's fine if a turnaround is possible. But the one I always looked at was Frontier Communications, a cable company that bet really big on expansion right before cord-cutting started and almost immediately undermined their business, putting them in a position where they kept a dividend long after they should because it propped up their stock price. You really need to look at all the factors.

Moser: Yeah, I agree with you. A point to note, too, is that Omega Healthcare Investors is a real estate investment trust. It's a healthcare industry REIT. Real estate investment trusts are known for their high dividend yields. They qualify for this REIT structure, meaning they have to pay out all of their REIT profitability in the form of a dividends to shareholders. REITs, generally speaking, maintain much higher dividend yields for that reason alone. Now, that is neither good nor bad on its own, but it is just something to note.

Real estate investment trusts have had a pretty good stretch here recently, as real estate has presented a number of new opportunities here between healthcare and retail and everywhere else under the sun. But it is worth noting that in really low interest rate environments like we're in today, real estate investment trusts can be seen as even better investments because that is where you're going to get more yield. You'll find more yield than you will on other dividend stocks like Microsoft, for example. That attractive yield brings in more buyers, which then pushes up the share price. That's all fine and dandy. That's great. It's not to say that it won't come back down or that it will. It's just something to note. Typically, real estate investment trusts can perform very well in these low-interest-rate environments because they are seen as great alternatives for really attractive yields. It's all about understanding the whole business, the sustainability of the dividend, understanding how long they've paid the dividend, will they be able to raise that dividend every year.

We talk about Dividend Aristocrats a lot here, companies that have grown their dividend annually for at least 25 consecutive years. Microsoft is not a Dividend Aristocrat yet because they haven't even had a dividend for 25 years. My suspicion is that they will be a Dividend Aristocrat in a short amount of time, though. That's another thing with Microsoft -- you can look forward to that dividend being raised every year for the foreseeable future. And it's going to be pretty darn sustainable, given the business model that they have.

Kline: I also think the average investor probably understands what Microsoft is more than they do technical real estate investment trust investments. Personally, if I can't wrap my hands around it -- and I study retail. Real estate is something I have an opinion on. But I honestly don't know what the long-term picture is in a country that needs less store space and more living, whether a particular real estate investment -- even medical. Are we going to go to doctors' offices on the level we do? You're a big Teladoc fan, so am I.

Moser: I'd like to believe not. I'd like to believe that these virtual healthcare companies are making it so that we don't necessarily have to go to the doctor's office if we need something.

Kline: Right. And you study this -- can you honestly talk about the impact that will have on where doctors need to be for real estate? It could dramatically change things. You could have a lot of doctors operating in phone booths just doing digital medicine all day.

Moser: You're right. You're also seeing CVS, for example, utilizing their big footprint of stores and basically converting those into healthcare centers as well. Going back to your point about real estate and how it's being viewed today, and how its use cases are changing due to the changing landscape, thanks to technology. Technology is changing everything, and healthcare is certainly not exempt from that.

Kline: Yeah. Those are much more complicated questions than, "Will people still use Windows 10 years from now? Is Word still going to be a thing when my kid is my age?" I could pretty comfortably say yes on both of those, because I don't think we're going to evolve past the need for operating systems and word processors.

Moser: Well, it's a good question. We do appreciate it. Hopefully that sheds a little bit of light on why Omega would have such a high dividend yield, and why that can be good, and it could also be something to keep an eye on. As always, feel free to keep firing away with those questions if we can ever help.

We want to jump in real quickly here to a segment that started gaining a little bit of traction here, Dan. It's something that Matt and I tried a few weeks back, and we just asked each other, what was the last stock you bought and why? I tell you, every week now, we've got our wonderful listeners firing in on Twitter and email telling us the stock they bought and why.

Israel Hilario, Twitter handle @mexaricanhomie, says the last stock that he bought was Stitch Fix. Why? He feels like, "It's one of the few companies where people are willingly handing out their data and they're making excellent use of it. They're growing to other apparel types, also. Feels like a matter of time before they are the default shopping stop." Thanks, Israel! Appreciate that.

And then, Gustafson @ribcrazed. He chimed in, said, "I've been eyeing Etsy for a couple weeks and I told my wife about it. Her response: Why haven't you already bought it? Thoroughly convinced me that our portfolio would be a welcoming home for an initial position on Etsy." @ribcrazed, listen, I own Etsy too. I think it's probably a good move. I think you'll be happy that you bought that one.

Stitch Fix, I just don't know enough about it yet. Dan, how do you feel about Stitch Fix?

Kline: I think Stitch Fix is in a very crowded space and they're an acquisition target. It's very interesting underlying technology. It's part of a big change. But I'm not ready to say that they're the winner and they're going to crowd out the competition.

Moser: Yeah, I think the concept is a winner. Certainly, you're seeing retail companies all over trying that model out. The concept is for sure a winner. Time will tell.

We want to know what the last stock you bought is and why. Make sure to hit us on email at [email protected], or get us on Twitter @MFIndustryFocus. Tell us, what's the last stock you bought and why?

And hey, if you're looking for some more stock ideas and recommendations, make sure to check out our Stock Advisor service. You'll get stock recommendations from David and Tom Gardner every month, Best Buys Now, and a whole lot more. Just go to if.fool.com. We've got a special 50% discount for listeners.

OK, Dan, we're going to wrap this week up here as always with one to watch. What is a stock that you'll be watching this coming week?

Kline: I want to talk about Peloton (PTON 0.66%), a stock that Dylan Lewis and I first looked at before their IPO. What I want to bring up is, there is a disconnect sometimes between people knowing a company, being enamored with a company, and their actual business. Let's remember again what Peloton does. They sell $2,500 exercise bikes in all order to get you to buy a $39 a month subscription. And yes, their content costs will eventually be low because their library of people working out will be so massive that they won't need as many new pieces, but that's a very limiting model. If, all of a sudden, they start selling a cheaper bike, or a different exercise product, they're going to undercut their whole business model. We said about it before, and I still agree -- this is a good private business. They can be profitable. Are they going to post 50% growth every quarter? Are they going to eventually produce any growth? It might be the kind of thing that just tops out. I didn't think it was a great business. And I think so far, the stock market has shown that when you look at the actual numbers, this is a tough path for a company to follow.

Moser: Yeah. That's one that I haven't felt fully convinced on yet either. I appreciate what you're saying there. I'm going to be going with McCormick (MKC 1.04%). Everybody knows it's my favorite spice maker. Ticker MKC. They have earnings out --

Kline: What's your second-favorite spice maker?

Moser: It's a little company called Dizzy Pig, and it's based out of Manassas, Virginia. I think that McCormick perhaps supplies them a little bit. Dizzy Pig is a bit more in the craft spice market, where they're making their own concoctions, but it's really good stuff. I recommend you check it out.

Kline: I didn't know if you were going to have an answer.

Moser: [laughs] I gotcha! Going to McCormick, though. We talked earlier about these dividend stocks and Dividend Aristocrats. McCormick is a Dividend Aristocrat. It was really refreshing to see last quarter that they reiterated their sales guidance for the year. They bumped up earnings guidance a little bit as they continue to work out some efficiencies in the business. If you go all the way back to the end of January this year, the stock sold off on earnings. It was around $120 a share. I was calling it a gift back then, and lo and behold, it's had a good resurgence here. I think the next thing on the radar for these guys is to be looking for any hint of an upcoming deal now that they've got this RB Foods acquisition taken care of. They've made mention on a couple of calls already that they are going to be looking to make another deal happen here sooner rather than later. That's the news I'm going to be looking out for.

Lovely company. It's one I own personally. I think it's a dividend you can rely on. They seem to be very proud of that Dividend Aristocrat status.

Dan, thanks so much for taking the time out of your day to join us. It was great having you.

Kline: Thanks for having me!

Moser: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. The show was produced by Austin Morgan. For Dan Kline, I'm Jason Moser. Thanks for listening, and we'll see you next week!