<![CDATA[Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated]]>

FLAHERTY & CRUMRINE DYNAMIC PREFERRED AND INCOME FUND

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

DFP’s fiscal 2014 got off to a strong start, as preferred securities continued to recover from 2013’s mid-year swoon. Total return on net asset value1 was +5.8% for the first fiscal quarter.2 Market price performance was even better: The Fund’s market price discount to NAV narrowed, generating total return on market value for the fiscal quarter of +13.0%.

The Fund also announced a monthly dividend increase to $0.16 per share, beginning in December 2013. This represented an increase of approximately 2.5% from the prior monthly dividend.

After a difficult stretch during the second half of 2013, the preferred securities market seemed ripe for recovery, and it didn’t disappoint. One probably would not have concluded that in December, however, when long-term interest rates rose to their highest levels of the year (nearly 4% for the 30-year Treasury bond) after the Federal Reserve began to taper its securities purchases. Many holders of preferred securities— particularly $25-par issues—sold them to book tax losses before year-end. Such selling pressure hurt prices even more. Preferred securities’ prices ended 2013 at or near their lows for the year.

As 2014 began, preferred securities started to turn around. Unusually cold temperatures and heavy snowfall blanketed much of the United States from December through February, dampening economic activity. Job growth sputtered, personal spending eased and housing activity slowed. The 30-year Treasury bond yield drifted back down to finish the fiscal quarter at 3.58%, 0.23% lower than where it started in December. Meanwhile, fundamental credit conditions—profits, balance sheets and loan performance, among others—continued to improve for most preferred issuers.

As fears of sharply higher interest rates faded and tax-loss selling ran its course, preferred investors returned to the market. And they had company! Some investors who typically focus on other fixed-income markets, such as corporate or high-yield bonds, also bought preferred securities, attracted by their higher yields in an otherwise low-yield environment. Those other fixed-income markets dwarf the preferred market in size, so even a small reallocation to preferreds inside a bond portfolio can translate into a lot of dollars being invested in preferreds. Demand for preferred securities picked up noticeably.

Among major issuers, financial companies, especially banks, are adapting to new rules and regulations implemented since the financial crisis. Regular readers of our letters will recall many discussions about Basel III and other regulatory pronouncements. These regulations are intended to strengthen balance sheets and improve transparency—positives for preferred investors. In almost every case in the U.S. and abroad, preferred securities are, or will be, an integral component of capital. As a result, we have seen and will continue to see a steady supply of new preferred issues. However, new issuance has been modest in size and readily absorbed by investors; and spreads on these and secondary-market issues have gradually compressed.

Although interest-rate fears have receded recently, we know many Fund investors remain concerned about the possibility of rising interest rates. Three observations. First, although preferred security prices tend to move with intermediate and long-term Treasury yields, their correlation is not perfect. Yields on preferred

 

 

 

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 

December 1, 2013—February 28, 2014

 


securities are high relative to Treasuries and corporate bonds, and they should be able to absorb some increase in Treasury yields while still generating positive total returns. We think improving credit fundamentals support that view.

Second, as the Fund’s experience in 2013’s third fiscal quarter demonstrated, prices of preferred securities can fall when interest rates increase significantly. However, preferred securities pay dividends year-in and year-out. If we have picked our credits correctly, over time, those dividends can turn modest principal losses into positive total returns. Shareholders probably will have to live through some quarter-to-quarter volatility, but we think prospective returns on preferred securities remain attractive for long-term investors.

Third, there are a number of ways we can manage interest-rate risk in a portfolio of preferred securities, even if we exclude outright interest-rate hedging. In particular, so-called “fixed-to-floating rate” preferred securities can offer attractive yields with only intermediate duration or interest-rate risk. A typical such security starts with a coupon rate that is fixed for five or 10 years and then floats at a margin over an index (usually 3-month LIBOR). These preferred securities have credit risk similar to fixed-rate issues, but they can have much less interest-rate risk. Of course, not all fixed-to-floating rate preferred securities are the same, and none are riskless. Investors need to evaluate each issue’s creditworthiness, terms and conditions carefully, something we spend a lot of time doing. As of February 28, 2014, roughly 71% of the Fund’s portfolio was comprised of fixed-to-floating rate issues, and they fit well with our market outlook.

In addition to managing interest-rate risk in its portfolio of preferred securities, the Fund also fixed the cost of a little more than 90% of its leverage until December 2015. This fixed pricing provides comfort that any increases in short-term rates before that date will not immediately limit the Fund’s ability to maintain its current dividend level due to higher leverage cost.

We expect economic growth to improve in the second quarter as weather effects fade. We don’t think weather was the whole story behind sluggish first-quarter growth, but it was an important factor, and one that inevitably will thaw come spring. Stronger growth may push interest rates higher once again. However, for 2014 as a whole, we foresee modest economic growth, improving credit conditions and accommodative monetary policy. That should translate into gradually (if erratically) rising Treasury rates along with narrower yield spreads on preferred securities. Investors should be prepared for some volatility over coming quarters, but we think “coupon” or “coupon minus a bit” returns on preferred securities should remain attractive for long-term investors.

As always, we encourage you to visit the Fund’s website, www.preferredincome.com, for current information on preferred-securities markets, the Fund and the broader economy.

Sincerely,

The Flaherty & Crumrine Portfolio Management Team:

R. Eric Chadwick

Donald F. Crumrine

Robert M. Ettinger

Bradford S. Stone

March 31, 2014

 

2


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OVERVIEW

February 28, 2014 (Unaudited)

 

Fund Statistics       
Net Asset Value   $ 23.47   
Market Price   $ 21.91   
Discount     6.65
Yield on Market Price     8.76
Common Stock Shares Outstanding     19,156,782   

 

Moody’s Ratings   % of Net Assets†  
A     2.1%   
BBB     51.2%   
BB     38.2%   
Below “BB”     3.2%   
Not Rated*     3.9%   
Below Investment Grade**     26%   

 

* Does not include net other assets and liabilities of 1.4%.
** 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†  
Citigroup     4.8%   
JPMorgan Chase     4.7%   
MetLife     4.2%   
Liberty Mutual Group     4.2%   
Prudential Financial     3.7%   
PNC Financial Services Group     3.6%   
HSBC PLC     3.3%   
Barclays Bank PLC     3.2%   
Royal Bank of Scotland PLC     3.2%   
Wells Fargo & Company     3.1%   
 
     % of Net Assets***†  
Holdings Generating Qualified Dividend Income (QDI) for Individuals     54%   
Holdings Generating Income Eligible for the Corporate Dividends Received Deduction (DRD)     34%   

 

*** 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

February 28, 2014 (Unaudited)

 

Shares/$ Par        

    Value    

 

 

Preferred Securities — 97.5%

   
       

Banking — 49.7%

  

  11,750     

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

  $ 11,741,922        * (1) 
  103,166     

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

    2,450,450        * (1) 
 

Banco Santander, S.A.:

   
  296,121     

Banco Santander, 10.50% Pfd., Series 10

    7,936,487        * *(1)(2) 
 

Bank of America:

   
$ 10,000,000     

Bank of America Corporation, 8.00%

    11,455,590        * (1) 
$ 7,110,000     

Bank of America Corporation, 8.125%

    8,144,007        * (1) 
 

Barclays Bank PLC:

   
$ 9,062,000     

Barclays Bank PLC, 6.278%

    8,940,986        * *(1)(2) 
  60,000     

Barclays Bank PLC, 7.10% Pfd.

    1,535,400        * *(2) 
$ 8,972,000     

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

    10,003,780        * *(1)(2) 
  31,907     

Barclays Bank PLC, 8.125% Pfd., Series 5

    826,391        * *(1)(2) 
  44,933     

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

    990,840        *   
$ 19,300,000     

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

    20,530,375        * *(1)(2) 
 

Citigroup:

   
  1,145,919     

Citigroup, Inc., 6.875% Pfd., Series K

    29,818,531        *   
  85,400     

Citigroup, Inc., 7.125% Pfd., Series J

    2,275,910        *   
 

CoBank ACB:

   
  1,700     

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

    171,275        *   
  175,000     

Fifth Third Bancorp, 6.625% Pfd., Series I

    4,651,938        *   
  33,550     

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

    949,180        * (1) 
  25,000     

First Republic Bank, 6.20% Pfd.

    599,813        *   
 

Goldman Sachs Group:

   
  172,000     

Goldman Sachs, 5.95% Pfd., Series I

    3,963,138        * (1) 
$ 11,892,000     

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

    12,419,410        (1 ) 
 

HSBC PLC:

   
$ 4,458,000     

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

    6,452,955        (1 )(2) 
  70,800     

HSBC Holdings PLC, 8.00% Pfd., Series 2

    1,902,573        * *(2) 
$ 3,910,000     

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

    3,973,537     
$ 1,100,000     

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

    1,118,224     
  343,800     

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

    8,584,273        *   
 

ING Groep NV:

   
  160,000     

ING Groep NV, 6.375% Pfd.

    3,936,000        * *(1)(2) 
  38,082     

ING Groep NV, 7.05% Pfd.

    969,625        * *(2) 
  3,201     

ING Groep NV, 7.20% Pfd.

    81,634        * *(1)(2) 
  235,000     

ING Groep NV, 7.375% Pfd.

    6,025,400        * *(1)(2) 
 

JPMorgan Chase:

   
$ 10,700,000     

JPMorgan Chase & Company, 6.00%, Series R

    10,700,000        * (1) 
$ 18,500,000     

JPMorgan Chase & Company, 7.90%, Series I

    20,853,200        * (1) 

 

4


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2014 (Unaudited)

 

Shares/$ Par        

    Value    

 

 

Preferred Securities — (Continued)

   
       

Banking — (Continued)

  

$ 14,022,000     

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

  $ 14,022,000        * *(1)(2) 
 

M&T Bank Corporation:

   
$ 1,500,000     

M&T Bank Corporation, 6.450%, Series E

    1,558,125        *   
$ 2,590,000     

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

    2,594,576        *   
 

Morgan Stanley:

   
  2,980     

Morgan Stanley Capital Trust III, 6.25% Pfd.

    74,299     
  39,002     

Morgan Stanley Capital Trust IV, 6.25% Pfd.

    978,708        (1 ) 
  368,430     

Morgan Stanley, 6.875%, Pfd., Series F

    9,534,968        *   
  91,200     

Morgan Stanley, 7.125%, Pfd., Series E

    2,444,297        *   
 

PNC Financial Services:

   
  451,824     

PNC Financial Services Group, Inc., 6.125% Pfd., Series P

    11,802,772        * (1) 
$ 11,748,000     

PNC Financial Services Group, Inc., 6.75%

    12,640,953        * (1) 
$ 8,625,000     

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

    11,406,563        (1 )(2) 
 

Royal Bank of Scotland:

   
$ 4,825,000     

RBS Capital Trust II, 6.425%

    4,674,219        * *(1)(2) 
  13,000     

Royal Bank of Scotland Group PLC, 6.60% Pfd., Series S

    299,910        * *(2) 
  647,500     

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

    16,187,500        * *(1)(2) 
  318,447     

SunTrust Banks, Inc., 5.875% Pfd.

    7,145,155        *   
  110,000     

US Bancorp, 6.50%, Pfd., Series F

    3,055,943        * (1) 
$ 18,000,000     

Wells Fargo & Company, 7.98%, Series K

    20,610,000        * (1) 
$ 10,000,000     

Zions Bancorporation, 7.20%, Series J

    10,400,000        *   

 

 

   

 

 

 
      333,432,832     
   

 

 

   
       

Financial Services — 1.7%

         
$ 5,600,000     

Charles Schwab Corporation, 7.00%

    6,412,000        * (1) 
 

Deutsche Bank:

   
  89,000     

Deutsche Bank Contingent Capital Trust III, 7.60% Pfd.

    2,352,493        * *(1)(2) 
  8,103     

Deutsche Bank Contingent Capital Trust V, 8.05% Pfd.

    220,645        * *(1)(2) 
$ 2,000,000     

General Electric Capital Corp., 7.125%, Series A

    2,273,616        * (1) 
 

HSBC PLC:

   
  8,500     

HSBC Finance Corporation, 6.36% Pfd., Series B

    206,231        *   

 

 

   

 

 

 
      11,464,985     
   

 

 

   

 

5


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2014 (Unaudited)

 

Shares/$ Par        

    Value    

 

 

Preferred Securities — (Continued)

   
       

Insurance — 31.6%

  

 

American International Group:

   
$ 4,000,000     

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

  $ 4,800,000        (1 ) 
$ 7,100,000     

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

    8,928,250        (1 ) 
$ 5,000,000     

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

    6,464,000        (1 ) 
$ 1,010,000     

Aon Corporation, 8.205% 01/01/27

    1,238,300     
  314,127     

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

    7,872,808        * *(1)(2) 
 

AXA SA:

   
$ 7,550,000     

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

    7,870,875        * *(1)(2) 
$ 8,950,000     

AXA SA, 8.60% 12/15/30

    11,567,875        (1 )(2) 
 

Axis Capital Holdings:

   
  4,300     

Axis Capital Holdings Ltd., 5.50% Pfd., Series D

    87,387        * *(2) 
  459,952     

Axis Capital Holdings Ltd., 6.875% Pfd., Series C

    11,651,734        * *(1)(2) 
  6,000     

Delphi Financial Group, 7.376% Pfd. 05/15/37

    149,625     
  41,000     

Endurance Specialty Holdings, 7.50% Pfd., Series B

    1,078,813        * *(2) 
$ 988,000     

Everest Re Holdings, 6.60% 05/15/37

    996,645        (1 ) 
 

GWL&A Financial:

   
$ 1,526,000     

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

    1,579,410        (1 ) 
 

Liberty Mutual Group:

   
$ 17,950,000     

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

    19,565,500        (1 ) 
$ 5,520,000     

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

    8,390,400        (1 ) 
$ 13,000,000     

Lincoln National Corporation, 7.00% 05/17/66

    13,325,000        (1 ) 
 

MetLife:

   
$ 3,759,000     

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

    5,676,090        (1 ) 
$ 17,200,000     

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

    22,489,000        (1 ) 
 

PartnerRe:

   
  20,486     

PartnerRe Ltd, 5.875%, Pfd. Series F

    443,522        * *(2) 
  37,556     

PartnerRe Ltd., 6.50% Pfd., Series D

    913,831        * *(2) 
  71,237     

PartnerRe Ltd., 7.250% Pfd., Series E

    1,838,627        * *(2) 
  720,000     

Principal Financial Group, 6.518% Pfd., Series B

    18,052,200        *   
 

Prudential Financial:

   
$ 6,930,000     

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

    7,189,875        (1 ) 
$ 6,375,000     

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

    6,661,875        (1 ) 
$ 9,070,000     

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

    11,110,750        (1 ) 
 

QBE Insurance:

   
$ 8,000,000     

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

    8,351,688        (1 )(2) 
$ 350,000     

StanCorp Financial Group, 6.90% 06/01/67

    353,500     
  288,323     

W.R. Berkley Corporation, 5.625% Pfd.

    6,107,402     

 

6


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2014 (Unaudited)

 

  Shares/$ Par              Value       

 

Preferred Securities — (Continued)

   
       

Insurance — (Continued)

  

 

XL Group PLC:

   
$ 17,080,000     

XL Capital Ltd., 6.50%, Series E

  $ 16,930,550        (1 )(2) 

 

 

   

 

 

 
      211,685,532     
   

 

 

   
       

Utilities — 4.9%

  

 

Commonwealth Edison:

   
$ 2,000,000     

COMED Financing III, 6.35% 03/15/33

  $ 1,970,000     
  10,400     

Entergy Louisiana, Inc., 6.95% Pfd.

    1,041,950        *   
  116,000     

Integrys Energy Group, Inc., 6.00% Pfd.

    2,895,534     
 

PPL Corp:

   
$ 19,500,000     

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

    19,562,127        (1 ) 
$ 5,500,000     

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

    5,606,370     
$ 2,000,000     

Southern California Edison Co., 6.25%, Series E

    2,129,352        *   

 

 

   

 

 

 
      33,205,333     
   

 

 

   
       

Energy — 2.7%

  

$ 9,780,000     

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

    9,217,650        (1 ) 
$ 4,000,000     

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

    4,508,388        (1 ) 
$ 3,675,000     

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

    4,110,318        (1 ) 

 

 

   

 

 

 
      17,836,356     
   

 

 

   
       

Real Estate Investment Trust (REIT) — 6.3%

  

  425,148     

Alexandria Real Estate, 6.45% Pfd. Series E

    10,152,534     
 

Duke Realty Corp.:

   
  100,000     

Duke Realty Corp, 6.50% Pfd., Series K

    2,412,500     
  234,877     

Duke Realty Corp, 6.60% Pfd., Series L

    5,705,515     
 

Kimco Realty:

   
  18,500     

Kimco Realty Corporation, 5.50% Pfd, Series J

    389,610     
  5,000     

Kimco Realty Corporation, 5.625% Pfd. Series K

    107,063     
  47,308     

Kimco Realty Corporation, 6.00% Pfd. Series I

    1,083,651     
  116,006     

Kimco Realty Corporation, 6.90% Pfd, Series H

    2,988,315        (1 ) 
 

National Retail Properties:

   
  45,300     

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

    940,541     
  27,879     

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

    665,541     

 

7


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2014 (Unaudited)

 

  Shares/$ Par              Value       

 

Preferred Securities — (Continued)

   
       

Real Estate Investment Trust (REIT) — (Continued)

  

 

PS Business Parks:

   
  23,808     

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

  $ 506,456     
  20,867     

PS Business Parks, Inc., 5.75%, Pfd., Series U

    444,676     
  487,476     

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

    10,938,961     
  97,606     

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

    2,316,434        (1 ) 
  12,180     

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

    308,276        (1 ) 
  112,614     

Public Storage, 6.35% Pfd, Series R

    2,842,659     
  7,035     

Regency Centers Corp, 6.625% Pfd., Series 6

    169,624     
  8,313     

Weingarten Realty Investors, 6.50% Pfd., Series F

    201,611        (1 ) 

 

 

   

 

 

 
      42,173,967     
   

 

 

   
       

Miscellaneous Industries — 0.6%

  

$ 4,430,000     

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

    3,998,075 (1)   

 

 

   

 

 

 
      3,998,075     
   

 

 

   
 

Total Preferred Securities
(Cost $656,554,591)

    653,797,080     
   

 

 

   

 

Corporate Debt Securities — 1.0%

   
       

Banking — 0.9%

  

$ 700,000     

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

    801,332     
  112,876     

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

    2,659,641        (1 ) 
  100,000     

Zions Bancorporation, 6.95%, 09/15/28, Sub Notes

    2,681,250     

 

 

   

 

 

 
      6,142,223     
   

 

 

   
       

Financial Services — 0.1%

  

  39,267     

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

    960,530 (1)   

 

 

   

 

 

 
      960,530     
   

 

 

   
 

Total Corporate Debt Securities
(Cost $6,982,150)

    7,102,753     
   

 

 

   

 

8


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2014 (Unaudited)

 

Shares/$ Par        

    Value    

 

Money Market Fund — 0.3%

  

 

 

 

 

BlackRock Liquidity Funds:

   
  1,963,829     

T-Fund

  $ 1,963,829     

 

 

   

 

 

Total Money Market Fund
(Cost $1,963,829)

    1,963,829     
   

 

 

   

Total Investments (Cost $665,500,570***)

     98.8%        662,863,662   

Other Assets And Liabilities (Net)

     1.2%        7,739,267   
  

 

 

   

 

 

 

Total Managed Assets

         100.0% ‡    $ 670,602,929   
  

 

 

   

 

 

 

Loan Principal Balance

  

    (221,000,000
    

 

 

 

Total Net Assets Available To Common Stock

  

  $ 449,602,929   
    

 

 

 

 

* 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 February 28, 2014, these securities amounted to $177,206,055 or 26.4% 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 $393,273,314 at February 28, 2014.
(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 December 1, 2013 through February 28, 2014 (Unaudited)

 

     Value  

OPERATIONS:

  

Net investment income

   $ 8,251,953   

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

     (292,825

Change in net unrealized appreciation/depreciation of investments

     16,086,192   
  

 

 

 

Net increase in net assets resulting from operations

     24,045,320   

DISTRIBUTIONS:

  

Dividends paid from net investment income to Common Stock Shareholders(2)

     (10,191,408
  

 

 

 

Total Distributions to Common Stock Shareholders

     (10,191,408

NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK

  

 

 

 

FOR THE PERIOD

   $ 13,853,912   
  

 

 

 
  
          

NET ASSETS AVAILABLE TO COMMON STOCK:

  

Beginning of period

   $ 435,749,017   

Net increase in net assets during the period

     13,853,912   
  

 

 

 

End of period

   $ 449,602,929   
  

 

 

 
  

 

(1)

These tables summarize the three months ended February 28, 2014 and should be read in conjunction with the Fund’s financial statements, including footnotes, in its Annual Report dated November 30, 2013.

(2) 

May include income earned, but not paid out, in prior fiscal year.

 

10


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

FINANCIAL HIGHLIGHTS(1)

For the period from December 1, 2013 through February 28, 2014 (Unaudited)

For a Common Stock share outstanding throughout the period

 

PER SHARE OPERATING PERFORMANCE:

  

Net asset value, beginning of period

   $ 22.75    
  

 

 

 

INVESTMENT OPERATIONS:

  

Net investment income

     0.43   

Net realized and unrealized gain/(loss) on investments

     0.82   
  

 

 

 

Total from investment operations

     1.25   
  

 

 

 

DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:

  

From net investment income

     (0.53
  

 

 

 

Total distributions to Common Stock Shareholders

     (0.53
  

 

 

 

Net asset value, end of period

   $ 23.47   
  

 

 

 

Market value, end of period

   $ 21.91   
  

 

 

 

Common Stock shares outstanding, end of period

     19,156,782   
  

 

 

 

RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:

  

Net investment income†

     7.64 %* 

Operating expenses including interest expense

     1.70 %* 

Operating expenses excluding interest expense

     1.12 %* 
        

SUPPLEMENTAL DATA:††

  

Portfolio turnover rate

     6 %** 

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

   $ 670,603   

Ratio of operating expenses including interest expense to total managed assets

     1.13 %* 

Ratio of operating expenses excluding interest expense to total managed assets

     0.74 %* 

 

 

(1) 

These tables summarize the three months ended February 28, 2014 and should be read in conjunction with the Fund’s audited financial statements, including footnotes, in its Annual Report dated November 30, 2013.

* 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)
 

December 31, 2013

   $ 0.2120       $ 22.46       $ 20.53       $ 20.49   

January 31, 2014

     0.1600         22.95         20.90         20.86   

February 28, 2014

     0.1600         23.47         21.91         21.92   

 

(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 February 28, 2014, the aggregate cost of securities for federal income tax purposes was $667,232,966, the aggregate gross unrealized appreciation for all securities in which there is an excess of value over tax cost was $8,060,788 and the aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over value was $12,430,092.

 

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 February 28, 2014 is as follows:

 

     Total
Value at
February 28, 2014
     Level 1
Quoted
Price
     Level 2
Significant
Observable
Inputs
     Level 3
Significant
Unobservable
Inputs
 

Preferred Securities

           

Banking

   $ 333,432,832       $ 241,424,420       $ 92,008,412       $   

Financial Services

     11,464,985         11,464,985                   

Insurance

     211,685,532         128,709,114         82,976,418           

Utilities

     33,205,333         22,457,661         10,747,672           

Energy

     17,836,356         4,508,388         13,327,968           

Real Estate Investment (REIT)

     42,173,967         42,173,967                   

Miscellaneous Industries

     3,998,075                 3,998,075           

Corporate Debt Securities

     7,102,753         6,301,421         801,332           

Money Market Fund

     1,963,829         1,963,829                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments

   $ 662,863,662       $ 459,003,785       $ 203,859,877       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

13


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

 

During the reporting period, there were no transfers into Level 1 from Level 2 or into Level 2 from Level 1.

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 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.

 

14


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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 c/o Computer share

P.O. Box 30170

College Station, TX 77842-3170

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

February 28, 2014

www.preferredincome.com