<![CDATA[Flaherty & Crumrine Dynamic Perferred and Income Fund Inc]]>

FLAHERTY & CRUMRINE DYNAMIC PREFERRED AND INCOME FUND

To the Shareholders of Flaherty & Crumrine Dynamic Preferred and Income Fund:

Total return on net asset value (“NAV”)1 was -4.0% during the third fiscal quarter2, reducing total return on NAV fiscal year-to-date to -4.2%. In addition, during the quarter the Fund, like many other closed-end income-oriented funds, saw the relationship between its market price and NAV swing from a premium to a discount, resulting in total return on market value of -14.2%. Clearly, this represented a setback in what had been a sustained period of positive returns for the preferred securities market. During the quarter, prices of all fixed-income securities, including preferred securities, declined and yields increased as markets reacted swiftly to expectations that the Federal Reserve might taper its quantitative easing earlier than anticipated.

Virtually all sectors of the fixed-income market turned in negative results during the quarter. U.S. Treasury 10-year notes and 30-year bonds experienced the largest declines with total returns of -4.6% and -6.5%, as their yields increased by 0.7% and 0.4%, respectively. Long-term corporate bonds performed moderately better than long-term U.S. Treasuries, with a total return of -4.7% for the Barclays Long U.S. Corporate Bond Index. Even including the impact of expenses and leverage, the Fund’s NAV performed as well as unlevered total returns on those other long-term segments of fixed-income markets.

The quarter began with the Federal Open Market Committee (“FOMC”) having just indicated that it might begin tapering the pace of its program of securities purchases sooner than the market was expecting. Longer-term interest rates moved higher with a fair amount of consistency throughout the quarter, as markets digested the news and adjusted expectations for future monetary policy actions. Markets are driven by expectations more than actual results, and while we believe the market priced in more risk than was justified based on the outlook for growth in the U.S. economy, uncertainty surrounding a potential change in policy outlook led investors to reduce portfolio duration substantially. At its September meeting, the FOMC surprised the market yet again by continuing its program of securities purchases without tapering its pace. Since then, we have seen some recovery in fixed-income markets. Although we do not expect long-term Treasury rates to decline significantly, interest-rate risk premiums still appear high, providing investors with some protection against eventual removal of highly accommodative monetary policy.

The preferred securities market was not immune to the change in outlook for interest rates and a desire by many investors to reduce duration in their portfolios. In many cases, spreads on preferred securities widened relative to Treasuries, adding to price declines already associated with higher rates. Retail preferred securities were particularly weak as we witnessed meaningful reductions in the sizes of preferred-securities exchange-traded funds—which had grown in size to represent about 9% of the retail market at the beginning of this quarter. Preferred securities issued in the early part of the year, most with very low coupons, were among the worst performers. Fortunately, we weren’t tempted by many of those new issues—much preferring the higher coupons available in the secondary market. Institutional preferred securities fared much better, and as they have a larger allocation in the portfolio they were partially responsible for limiting negative returns during the quarter.

Creditworthiness of most preferred-securities issuers continues to improve. Corporate earnings are growing at a moderate pace and corporate leverage remains low. Banks’ problem loans are declining, capital levels are healthy (especially in the U.S.) and new lending is slowly picking up. Rising home prices

 

 

 

1

Following the methodology required by the SEC, total return assumes dividend reinvestment and includes income and principal change, plus the impact of the Fund’s leverage and expenses.

2 

June 1st—August 31st.

 


are bolstering consumer balance sheets and trimming foreclosure losses. These favorable credit developments should continue to benefit preferred securities.

While prices have fallen, market conditions for preferred securities remain healthy. Higher interest rates and wider spreads have resulted in a material slowdown in issuer redemptions. For the year, redemptions are still running ahead of new supply, with the preferred-securities market shrinking more than $10 billion, but the pace of redemptions slowed significantly this past quarter. A slowdown in issuer redemptions is always welcome news on the income side of the equation.

After a long wait, we now have largely final rules on the regulatory treatment of preferred securities issued by banks, foreign and domestic. Crafted in response to the financial crisis, new legislation and regulations shift loss burdens towards investors and away from taxpayers (government support). Under the new rules, banks will have an incentive to replace “debt-like” preferred securities with ones that have more characteristics of equity (deeper subordination, non-cumulative dividends, and no maturity date). The new rules include various implementation schedules, depending on the jurisdiction, with most being fully implemented within the next 3-8 years.

To conform to the new rules, we estimate U.S. banks will need to issue an additional $60 billion or more of new preferred stock. That is certainly a big number compared to $73 billion of currently outstanding bank preferred stock. While we think issuance will be manageable and spread out over several years, it will influence preferred securities’ prices when it happens. We are also likely to see more contingent capital issued in the coming years, as issuers look to fill different buckets of loss-absorbing capital required under the new rules. This market has so far been limited in size and breadth, but it is likely to grow and is part of the ongoing evolution of the broader subordinated capital market.

Looking ahead, moderate economic growth should provide a constructive environment for preferred-securities investors. We anticipate that economic growth will be fast enough to facilitate continued improvement in corporate and household balance sheets and better loan performance, while being slow enough to restrain inflation and keep monetary policy accommodative for some time. Spreads on preferred securities should recover as fears of further rapid increases in long-term interest rates recede and investors refocus on steadily improving credit conditions. Volatility is likely to remain elevated over the coming months, but we believe the preferred-securities market has priced in a good amount of risk related to the end of quantitative easing.

As always, we encourage you to visit the Fund’s website www.preferredincome.com.

Sincerely,

 

LOGO   LOGO

Donald F. Crumrine

Chairman

 

Robert M. Ettinger

President

September 30, 2013  

 

2


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OVERVIEW

August 31, 2013 (Unaudited)

 

Fund Statistics       
Net Asset Value   $ 22.49   
Market Price   $ 21.15   

Discount

    5.96
Yield on Market Price     8.85
Common Stock Shares Outstanding     19,156,782   

 

Moody’s Ratings   % of Net Assets†  
A     2.3%   
BBB     55.6%   
BB     28.4%   
Below “BB”     8.9%   
Not Rated*     3.5%   
Below Investment Grade**     25.3%   

 

* Does not include net other assets and liabilities of 1.3%.
** Below investment grade by all of Moody’s, S&P, and Fitch.
Industry Categories   % of Net Assets†

 

LOGO

 

Top 10 Holdings by Issuer   % of Net Assets†  

JPMorgan Chase

    4.6%   

Citigroup

    4.6%   

Liberty Mutual Group

    4.4%   

MetLife

    4.3%   

HSBC PLC

    4.1%   

PNC Financial Services Group

    3.6%   

Prudential Financial

    3.6%   

Wells Fargo & Company

    3.3%   

Bank of America Corporation

    3.1%   

Barclays Bank PLC

    3.1%   
 
     % of Net Assets***†  
Holdings Generating Qualified Dividend Income (QDI) for Individuals     48%   
Holdings Generating Income Eligible for the Corporate Dividends Received Deduction (DRD)     29%   

 

*** This does not reflect year-end results or actual tax categorization of Fund distributions. These percentages can, and do, change, perhaps significantly, depending on market conditions. Investors should consult their tax advisor regarding their personal situation.
Net Assets includes assets attributable to the use of leverage.

 

3


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS

August 31, 2013 (Unaudited)

 

Shares/$ Par        

    Value    

 

Preferred Securities — 97.0%

   
       

Banking — 48.0%

  11,750     

AgStar Financial Services ACA, 6.75% Pfd., 144A****

  $ 11,727,234 *(1)   
  103,166     

Astoria Financial Corp., 6.50% Pfd., Series C

    2,411,247 *(1)   
 

Banco Santander, S.A.:

   
  296,121     

Banco Santander, 10.50% Pfd., Series 10

    7,972,318 **(1)(2)   
 

Bank of America:

   
$ 11,000,000     

Bank of America Corporation, 8.00%

    12,112,826 *(1)   
$ 7,110,000     

Bank of America Corporation, 8.125%

    7,892,050 *(1)   
  20,000     

Countrywide Capital V, 7.00% Pfd. 11/01/36

    502,050 (1)   
 

Barclays Bank PLC:

   
$ 9,062,000     

Barclays Bank PLC, 6.278%

    8,225,333 **(1)(2)   
  60,000     

Barclays Bank PLC, 7.10% Pfd.

    1,492,800 **(2)   
$ 8,972,000     

Barclays Bank PLC, 7.434%, 144A****

    9,689,760 **(1)(2)   
  31,907     

Barclays Bank PLC, 8.125% Pfd., Series 5

    805,652 **(1)(2)   
  41,633     

BB&T Corporation, 5.625% Pfd., Series E

    894,693  
$ 19,300,000     

BNP Paribas, 7.195%, 144A****

    19,155,250 **(1)(2)   
 

Citigroup:

   
$ 16,000,000     

Citigroup, Inc., 5.90%

    15,181,584  
$ 4,325,000     

Citigroup, Inc., 5.95%

    4,114,156  
  391,500     

Citigroup Capital XIII, 7.875% Pfd.

    10,754,035 (1)   
  1,700     

CoBank ACB, 6.25% Pfd., 144A****

    173,772  
  33,550     

First Niagara Financial Group, Inc., 8.625% Pfd.

    934,159 *(1)   
  25,000     

First Republic Bank, 6.20% Pfd.

    574,220  
 

Goldman Sachs Group:

   
  220,000     

Goldman Sachs, 5.95% Pfd., Series I

    5,025,636 *(1)   
$ 7,500,000     

Goldman Sachs, Capital I, 6.345% 02/15/34

    7,197,495 (1)   
 

HSBC PLC:

   
$ 13,858,000     

HSBC Capital Funding LP, 10.176%, 144A****

    19,626,393 (1)(2)   
$ 3,910,000     

HSBC USA Capital Trust I, 7.808% 12/15/26, 144A****

    3,988,200     
$ 1,100,000     

HSBC USA Capital Trust II, 8.38% 05/15/27, 144A****

    1,117,855     
  63,800     

HSBC USA, Inc., 6.50% Pfd., Series H

    1,589,022  
 

ING Groep NV:

   
  160,000     

ING Groep NV, 6.375% Pfd.

    3,665,600 **(1)(2)   
  38,082     

ING Groep NV, 7.05% Pfd.

    939,578 **(2)   
  3,201     

ING Groep NV, 7.20% Pfd.

    79,713 **(1)(2)   
  235,000     

ING Groep NV, 7.375% Pfd.

    5,940,800 **(1)(2)   
 

JPMorgan Chase:

   
$ 10,700,000     

JPMorgan Chase & Company, 6.00%, Series R

    10,218,500 *(1)   
$ 18,000,000     

JPMorgan Chase & Company, 7.90%, Series I

    19,864,440 *(1)   

 

4


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2013 (Unaudited)

 

Shares/$ Par        

    Value    

 

Preferred Securities — (Continued)

   
       

Banking — (Continued)

$ 14,022,000     

Lloyds Banking Group PLC, 6.657%, 144A****

  $ 12,830,130 **(1)(2)   
$ 1,990,000     

M&T Bank Corporation, 6.875%, 144A****

    2,020,552  
 

Morgan Stanley:

   
  5,721     

Morgan Stanley Capital Trust III, 6.25% Pfd.

    140,122     
  81,045     

Morgan Stanley Capital Trust IV, 6.25% Pfd.

    1,978,009 (1)   
  44,892     

Morgan Stanley Capital Trust VI, 6.60% Pfd. 02/01/46

    1,116,689 (1)   
  136,542     

Morgan Stanley Capital Trust VII, 6.60% Pfd.

    3,375,318 (1)   
  107,539     

Morgan Stanley Capital Trust VIII, 6.45% Pfd. 04/15/67

    2,652,987 (1)   
 

PNC Financial Services:

   
  451,824     

PNC Financial Services, 6.125% Pfd., Series P

    11,513,605 *(1)   
$ 11,748,000     

PNC Financial Services, 6.75%

    12,270,058 *(1)   
$ 8,625,000     

RaboBank Nederland, 11.00%, 144A****

    11,230,026 (1)(2)   
 

Royal Bank of Scotland:

   
$ 4,825,000     

RBS Capital Trust II, 6.425% 12/29/49

    4,101,250 **(1)(2)   
  647,500     

Royal Bank of Scotland Group PLC, 7.25% Pfd., Series T

    14,853,650 **(1)(2)   
  321,747     

SunTrust Banks, Inc., 5.875% Pfd.

    7,056,716  
  110,000     

US Bancorp, 6.50%, Pfd.

    2,877,193 *(1)   
 

Wells Fargo:

   
  50,000     

Wells Fargo & Company, 5.85% Pfd.

    1,217,190  
$ 18,000,000     

Wells Fargo & Company, 7.98%, Series K

    20,160,000 *(1)   
$ 10,000,000     

Zions Bancorporation, 7.20%, Series J

    9,975,000  

 

 

   

 

      313,234,866     
   

 

 

   
       

Financial Services — 2.4%

$ 3,780,000     

American Express Co., 6.80% 09/01/66

    4,051,215 (1)   
$ 5,600,000     

Charles Schwab Corporation, 7.00%

    6,160,000 *(1)   
 

Deutsche Bank:

   
  114,000     

Deutsche Bank Contingent Capital Trust III, 7.60% Pfd.

    3,001,620 **(1)(2)   
  8,103     

Deutsche Bank Contingent Capital Trust V, 8.05% Pfd.

    223,805 **(1)(2)   
$ 2,000,000     

General Electric Capital Corp., 7.125%, Series A

    2,208,574 *(1)   
  8,500     

HSBC Finance Corporation, 6.36% Pfd., Series B

    199,686  

 

 

   

 

      15,844,900     
   

 

 

   

 

5


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2013 (Unaudited)

 

Shares/$ Par        

    Value    

 

Preferred Securities — (Continued)

   
       

Insurance — 31.8%

 

American International Group:

   
$ 4,000,000     

AIG Life Holdings, Inc., 7.57%, 144A****

  $ 4,680,000 (1)   
$ 7,100,000     

AIG Life Holdings, Inc., 8.125%, 144A****

    8,502,250 (1)   
$ 5,000,000     

American International Group, Inc., 8.175% 05/15/58

    5,887,500 (1)   
$ 1,010,000     

Aon Corporation, 8.205% 01/01/27

    1,240,528     
  314,127     

Arch Capital Group, Ltd., 6.75% Pfd., Series C

    7,607,779 **(1)(2)   
 

AXA SA:

   
$ 7,550,000     

AXA SA, 6.379%, 144A****

    7,399,000 **(1)(2)   
$ 8,950,000     

AXA SA, 8.60% 12/15/30

    10,628,125 (1)(2)   
 

Axis Capital Holdings:

   
  4,300     

Axis Capital Holdings Ltd., 5.50% Pfd.

    85,624 **(2)   
  429,952     

Axis Capital Holdings, 6.875% Pfd., Series C

    10,426,336 **(1)(2)   
  41,000     

Endurance Specialty Holdings, 7.50% Pfd.

    1,026,291 **(2)   
$ 988,000     

Everest Re Holdings, 6.60% 05/15/37

    985,530 (1)   
 

GWL&A Financial:

   
$ 2,200,000     

Great West Life & Annuity Insurance, 7.153% 05/16/46, 144A****

    2,271,500 (1)   
 

Liberty Mutual Group:

   
$ 17,950,000     

Liberty Mutual Group, 7.80% 03/15/37, 144A****

    20,283,500 (1)   
$ 5,520,000     

Liberty Mutual Group, 10.75% 06/15/58, 144A****

    8,197,200 (1)   
$ 13,000,000     

Lincoln National Corporation, 7.00% 05/17/66

    13,260,000 (1)   
 

MetLife:

   
$ 3,759,000     

MetLife, Inc., 10.75% 08/01/39

    5,582,115 (1)   
$ 17,200,000     

MetLife Capital Trust X, 9.25% 04/08/38, 144A****

    22,360,000 (1)   
 

PartnerRe:

   
  64,279     

PartnerRe Ltd., 6.50% Pfd.

    1,532,656 **(2)   
  65,000     

PartnerRe Ltd., 7.250% Pfd., Series E

    1,644,500 **(2)   
  720,000     

Principal Financial Group, 6.518% Pfd., Series B

    18,052,200  
 

Prudential Financial:

   
$ 9,070,000     

Prudential Financial Inc., 8.875% 06/15/38

    10,974,700 (1)   
$ 6,375,000     

Prudential Financial, Inc., 5.875% 09/15/42

    6,247,500 (1)   
$ 6,930,000     

Prudential Financial, Inc., 5.625% 06/15/43

    6,514,200 (1)   
 

QBE Insurance:

   
$ 8,000,000     

QBE Capital Funding III Ltd., 7.25% 05/24/41, 144A****

    8,452,488 (1)(2)   
$ 350,000     

StanCorp Financial Group, 6.90% 06/01/67

    350,875     
  288,323     

W.R. Berkley Corporation, 5.625% Pfd.

    6,189,949     

 

6


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2013 (Unaudited)

 

Shares/$ Par        

    Value    

 

Preferred Securities — (Continued)

   
       

Insurance — (Continued)

 

XL Group PLC:

   
$ 17,080,000     

XL Capital Ltd., 6.50%, Series E

  $ 16,610,300 (1)(2)   

 

 

   

 

      206,992,646     
   

 

 

   
       

Utilities — 5.2%

 

Commonwealth Edison:

   
$ 2,000,000     

COMED Financing III, 6.35% 03/15/33

    1,900,000     
  10,400     

Entergy Louisiana, Inc., 6.95% Pfd.

    1,044,226  
  116,000     

Integrys Energy Group, Inc., 6.00% Pfd.

    2,849,250     
 

PPL Corp:

   
$ 19,500,000     

PPL Capital Funding, Inc., 6.70% 03/30/67, Series A

    20,198,412 (1)   
$ 5,500,000     

Puget Sound Energy, Inc., 6.974% 06/01/67

    5,811,965     
$ 2,000,000     

Southern California Edison Co., 6.25%, Series E

    2,099,032  

 

 

   

 

      33,902,885     
   

 

 

   
       

Energy — 3.0%

$ 10,005,000     

DCP Midstream LLC, 5.85% 05/21/2043, 144A****

    9,329,662 (1)   
$ 4,000,000     

Enbridge Energy Partners LP, 8.05% 10/01/37

    4,480,880 (1)   
 

Enterprise Products Partners:

   
$ 1,630,000     

Enterprise Products Partners, 8.375% 08/01/66, Series A

    1,814,555 (1)   
$ 3,675,000     

Enterprise Products Partners, 7.034% 01/15/68, Series B

    4,083,112 (1)   

 

 

   

 

      19,708,209     
   

 

 

   
       

Real Estate Investment Trust (REIT) — 6.0%

  425,148     

Alexandria Real Estate, 6.45% Pfd., Series E

    10,024,990     
 

Duke Realty Corp.:

   
  100,000     

Duke Realty Corp, 6.50% Pfd., Series K

    2,356,250     
  234,877     

Duke Realty Corp, 6.60% Pfd., Series L

    5,578,329     
 

Kimco Realty:

   
  47,308     

Kimco Realty Corporation, 6.00% Pfd., Series I

    1,073,489     
  133,506     

Kimco Realty Corporation, 6.90% Pfd., Series H

    3,376,367 (1)   
 

National Retail Properties:

   
  26,000     

National Retail Properties, Inc., 5.70% Pfd., Series E

    531,739     
  7,879     

National Retail Properties, Inc., 6.625% Pfd., Series D

    185,255     

 

7


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2013 (Unaudited)

 

Shares/$ Par        

    Value    

 

Preferred Securities — (Continued)

   
       

Real Estate Investment Trust (REIT) — (Continued)

 

PS Business Parks:

   
  20,808     

PS Business Parks, Inc., 5.70% Pfd., Series V

  $ 438,841     
  396,651     

PS Business Parks, Inc., 6.00% Pfd., Series T

    8,547,829     
  72,606     

PS Business Parks, Inc., 6.45% Pfd., Series S

    1,691,829 (1)   
  12,180     

PS Business Parks, Inc., 6.875% Pfd., Series R

    300,968 (1)   
  185,100     

Public Storage, 6.35% Pfd., Series R

    4,534,950     
  6,335     

Regency Centers Corporation, 6.625% Pfd.

    149,706     
  8,313     

Weingarten Realty Investors, 6.50% Pfd., Series F

    206,527 (1)   

 

 

   

 

      38,997,069     
   

 

 

   
       

Miscellaneous Industries — 0.6%

$ 4,430,000     

Textron Financial Corporation, 6.00% 02/15/67, 144A****

    3,953,775 (1)   

 

 

   

 

      3,953,775     
   

 

 

   
 

Total Preferred Securities
(Cost $657,213,731)

    632,634,350     
   

 

 

   

 

Corporate Debt Securities — 1.7%

   
       

Banking — 1.5%

$ 6,556,000     

Goldman Sachs Group, Inc., 6.75% 10/01/37, Sub Notes

    6,786,194 (1)   
$ 700,000     

Regions Financial Corporation, 7.375% 12/10/37, Sub Notes

    757,938     
  102,985     

Texas Capital Bancshares Inc., 6.50% 09/21/42, Sub Notes

    2,320,386 (1)   

 

 

   

 

      9,864,518     
   

 

 

   
       

Financial Services — 0.2%

  39,267     

Affiliated Managers Group, Inc., 6.375% 08/15/42

    923,619 (1)   

 

 

   

 

      923,619     
   

 

 

   
 

Total Corporate Debt Securities
(Cost $11,517,436)

    10,788,137     
   

 

 

   

 

8


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2013 (Unaudited)

 

Shares/$ Par        

    Value    

 

Money Market Fund — 0.0%

  

 

 

 

 

BlackRock Liquidity Funds:

   
  78,942     

T-Fund

  $ 78,942     

 

 

   

 

 

Total Money Market Fund
(Cost $78,942)

    78,942     
   

 

 

   

Total Investments (Cost $668,810,109***)

     98.7%        643,501,429   

Other Assets And Liabilities (Net)

     1.3%        8,419,503   
  

 

 

   

 

 

 

Total Managed Assets

         100.0% ‡    $ 651,920,932   
  

 

 

   

 

 

 

Loan Principal Balance

  

    (221,000,000
    

 

 

 

Total Net Assets Available To Common Stock

  

  $ 430,920,932   
    

 

 

 

 

* Securities eligible for the Dividends Received Deduction and distributing Qualified Dividend Income.
** Securities distributing Qualified Dividend Income only.
*** Aggregate cost of securities held.
**** Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional buyers. At August 31, 2013, these securities amounted to $186,988,547 or 28.7% of total managed assets.
(1)  All or a portion of this security is pledged as collateral for the Fund’s loan. The total value of such securities was $423,494,499 at August 31, 2013.
(2)  Foreign Issuer.
The percentage shown for each investment category is the total value of that category as a percentage of total managed assets.

 

    ABBREVIATIONS:

Pfd.

    Preferred Securities

REIT

    Real Estate Investment Trust

 

9


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)

For the period from May 29, 2013(2) through August 31, 2013 (Unaudited)

 

     Value  

OPERATIONS:

  

Net investment income

   $ 5,809,484   

Net realized gain/(loss) on investments sold during the period

     (13,287

Change in net unrealized appreciation/depreciation of investments

     (25,308,680
  

 

 

 

Net decrease in net assets resulting from operations

     (19,512,483

DISTRIBUTIONS:

  

Dividends paid from net investment income to Common Stock Shareholders(3)

     (5,976,916
  

 

 

 

Total Distributions to Common Stock Shareholders

     (5,976,916

FUND SHARE TRANSACTIONS:

  

Increase from Common Stock Transactions

     457,267,943   

Decrease due to Cost of Common Stock Offering

     (957,629
  

 

 

 

Net increase in net assets available to Common Stock resulting from
Fund share transactions

     456,310,314   

NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK

  

 

 

 

FOR THE PERIOD

   $ 430,820,915   
  

 

 

 
  
          

NET ASSETS AVAILABLE TO COMMON STOCK:

  

Beginning of period

   $ 100,017   

Net increase in net assets during the period

     430,820,915   
  

 

 

 

End of period

   $ 430,920,932   
  

 

 

 
  

 

(1)

These tables summarize the period from May 29, 2013 through August 31, 2013 and should be read in conjunction with the Fund’s financial statements, including footnotes, in its Semi Annual Report dated May 31, 2013.

(2) 

Commencement of operations.

 

10


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

FINANCIAL HIGHLIGHTS(1)

For the period from May 29, 2013(2) through August 31, 2013 (Unaudited)

For a Common Stock share outstanding throughout the period

 

PER SHARE OPERATING PERFORMANCE:

  

Net asset value, beginning of period

   $ 23.83 (3) 
  

 

 

 

INVESTMENT OPERATIONS:

  

Net investment income

     0.30   

Net realized and unrealized gain/(loss) on investments

     (1.33
  

 

 

 

Total from investment operations

     (1.03
  

 

 

 

DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:

  

From net investment income

     (0.31
  

 

 

 

Total distributions to Common Stock Shareholders

     (0.31
  

 

 

 

Net asset value, end of period

   $ 22.49   
  

 

 

 

Market value, end of period

   $ 21.15   
  

 

 

 

Common Stock shares outstanding, end of period

     19,156,782   
  

 

 

 

RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:

  

Net investment income†

     5.18 %* 

Operating expenses including interest expense

     1.29 %* 

Operating expenses excluding interest expense

     0.99 %* 
        

SUPPLEMENTAL DATA:††

  

Portfolio turnover rate

     3 %** 

Total managed assets, end of period (in 000’s)

   $ 651,921   

Ratio of operating expenses including interest expense to total managed assets

     1.05 %* 

Ratio of operating expenses excluding interest expense to total managed assets

     0.80 %* 

 

 

(1) 

These tables summarize the period from May 29, 2013 through August 31, 2013 and should be read in conjunction with the Fund’s audited financial statements, including footnotes, in its Semi Annual Report dated May 31, 2013.

(2) 

Commencement of operations.

(3) 

Net asset value at beginning of the period reflects the deduction of the sales load of $1.125 per share and offering cost of $0.05 per share paid by the shareholder from the $25.00 offering price.

* Annualized.
** Not Annualized.
The net investment income ratios reflect income net of operating expenses, including interest expense.
†† Information presented under heading Supplemental Data includes loan principal balance.

 

11


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

FINANCIAL HIGHLIGHTS (Continued)

Per Share of Common Stock (Unaudited)

 

     Total
Dividends
Paid
     Net Asset
Value
     NYSE
Closing Price
     Dividend
Reinvestment
Price(1)
 

May 31, 2013

     N/A       $ 23.76       $ 25.00         N/A   

June 28, 2013

     N/A         23.10         25.00         N/A   

July 31, 2013

     0.156         23.14         22.09         N/A   

August 30, 2013

     0.156         22.49         21.15         N/A   

 

(1) 

Whenever the net asset value per share of the Fund’s Common Stock is less than or equal to the market price per share on the reinvestment date, new shares issued will be valued at the higher of net asset value or 95% of the then current market price. Otherwise, the reinvestment shares of Common Stock will be purchased in the open market.

 

12


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited)

 

1. Aggregate Information for Federal Income Tax Purposes

At August 31, 2013, the aggregate cost of securities for federal income tax purposes was $668,810,109, the aggregate gross unrealized appreciation for all securities in which there is an excess of value over tax cost was $1,186,657 and the aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over value was $26,495,337.

 

2. Additional Accounting Standards

Fair Value Measurements: The Fund has performed an analysis of all existing investments and derivative instruments to determine the significance and character of all inputs to their fair value determination. The levels of fair value inputs used to measure the Fund’s investments are characterized into a fair value hierarchy. Where inputs for an asset or liability fall into more than one level in the fair value hierarchy, the investment is classified in its entirety based on the lowest level input that is significant to that investment’s valuation. The three levels of the fair value hierarchy are described below:

 

•       Level 1

    quoted prices in active markets for identical securities

•       Level 2

    other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)

•       Level 3

    significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Transfers in and out of levels are recognized at market value at the end of the period. A summary of the inputs used to value the Fund’s investments as of August 31, 2013 is as follows:

 

     Total
Value at
August 31, 2013
     Level 1
Quoted
Price
     Level 2
Significant
Observable
Inputs
     Level 3
Significant
Unobservable
Inputs
 

Preferred Securities

           

Banking

   $ 313,234,866       $ 212,204,241       $ 101,030,625       $   

Financial Services

     15,844,900         11,793,685         4,051,215           

Insurance

     206,992,646         118,822,450         88,170,196           

Utilities

     33,902,885         23,047,662         10,855,223           

Energy

     19,708,209         6,295,435         13,412,774           

Real Estate Investment Trust (REIT)

     38,997,069         38,997,069                   

Miscellaneous Industries

     3,953,775                 3,953,775           

Corporate Debt Securities

     10,788,137         10,030,199         757,938           

Money Market Fund

     78,942         78,942                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments

   $ 643,501,429       $ 421,269,683       $ 222,231,746       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

13


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

 

During the reporting period, securities with an aggregate market value of $19,155,250 were transferred into Level 1 from Level 2. During the reporting period, securities with an aggregate market value of $7,892,050 were transferred into Level 2 from Level 1. The securities were transferred because of a reduction in the amount of observable market data, resulting from: a decrease in market activity for the securities, reduced availability of quoted prices for the securities, or de-listing of securities from a national securities exchange that resulted in a material decrease in activity.

The fair values of the Fund’s investments are generally based on market information and quotes received from brokers or independent pricing services—approved by the Board and unaffiliated with the Adviser. To assess the continuing appropriateness of security valuations, management, in consultation with the Adviser, regularly compares current prices to prior prices, prices across comparable securities, actual sale prices for securities in the Fund’s portfolio, and market information obtained by the Adviser as a function of being an active participant in the markets.

Securities with quotes that are based on actual trades or actionable bids and offers with a sufficient level of activity on or near the measurement date are classified as Level 1. Securities that are priced using quotes derived from implied values, indicative bids and offers, or a limited number of actual trades—or the same information for securities that are similar in many respects to those being valued—are classified as Level 2. If market information is not available for securities being valued, or materially-comparable securities, then those securities are classified as Level 3. In considering market information, management evaluates changes in liquidity, willingness of a broker to execute at the quoted price, the depth and consistency of prices from pricing services, and the existence of observable trades in the market.

 

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Directors

Donald F. Crumrine, CFA

Chairman of the Board

David Gale

Morgan Gust

Karen H. Hogan

Robert F. Wulf, CFA

Officers

Donald F. Crumrine, CFA

Chief Executive Officer

Robert M. Ettinger, CFA

President

R. Eric Chadwick, CFA

Chief Financial Officer,

Vice President and Treasurer

Chad C. Conwell

Chief Compliance Officer,

Vice President and Secretary

Bradford S. Stone

Vice President and

Assistant Treasurer

Laurie C. Lodolo

Assistant Compliance Officer,

Assistant Treasurer and

Assistant Secretary

Linda M. Puchalski

Assistant Treasurer

Investment Adviser

Flaherty & Crumrine Incorporated

e-mail: flaherty@pfdincome.com

Servicing Agent

Destra Capital Investments LLC

1-877-855-3434

Questions concerning your shares of Flaherty & Crumrine Dynamic Preferred and Income Fund?

   

If your shares are held in a Brokerage Account, contact your Broker.

   

If you have physical possession of your shares in certificate form, contact the Fund’s Transfer Agent ––

BNY Mellon Investment Servicing (US) Inc.

P.O. Box 358035

Pittsburgh, PA 15252-8035

1-866-351-7446

This report is sent to shareholders of Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated for their information. It is not a Prospectus, circular or representation intended for use in the purchase or sale of shares of the Fund or of any securities mentioned in this report.

 

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Quarterly

Report

August 31, 2013

www.preferredincome.com