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”):

The preferred market didn’t miss a beat in the third fiscal quarter1, continuing where it left off second quarter with additional positive returns. Total return2 on net asset value (“NAV”) was 7.3% for the quarter, bringing the total return for the first nine months of fiscal 2016 to 12.1%. Total return on market price over the same periods was 6.5% and 15.6%, respectively.

Tailwinds described earlier in the year continued unabated during the most recent quarter. Monetary policy globally was very accommodative; supply of new preferred securities was subdued; “legacy” (those losing regulatory-capital treatment) and higher-coupon preferred securities were redeemed at a healthy pace; and credit quality remained strong. Preferred securities offered yield to investors struggling to find it in other places, which resulted in strong demand and higher prices for the asset class.

There is a direct inverse relationship in fixed-income securities (including preferreds) between price and yield, and higher prices this year have led to much lower coupons for newly-issued preferred securities. Many new issues during the quarter yield in the range of 4.5%—5.5%, which in many cases is lower than early-2016 levels by almost 1.0%. These lower yields on preferreds were the result of lower overall interest rates (Treasuries and Swap Rates) and tighter spreads. Many issuers have taken advantage of persistently-low rates and positive market sentiment to refinance higher-coupon securities.

Although U.S. interest rates remain very low, the short end of the curve (notably T-bills and LIBOR) has moved higher in recent months as investors begin to factor in additional rate hikes by the Federal Reserve. The Federal Open Market Committee passed on a rate hike at its meeting on September 21, however, so markets continue to wrestle with predicting a future path of increases. Higher levels of 3-month LIBOR have resulted in higher leverage costs for the Fund, and future changes in this reference rate will be highly correlated to Federal Reserve rate changes. Although leverage still adds substantial incremental net income for the Fund, we expect that to decline modestly over time as borrowing costs rise.

We continue to see value in preferred securities, although security selection has become more challenging as yields have moved lower and older, higher-coupon issues have been refinanced. Flows into the preferred market (via mutual funds, exchange-traded funds (ETFs), asset managers, and retail investors) have been very strong for many years. If anything gives us pause, it is more this level of inflow than current valuations. ETFs that invest in preferreds have become very large relative to their target market segment ($25-par listed securities), and it isn’t clear where the outer limits are located. We know ETFs have been a source of volatility in the past (or opportunity, depending on one’s viewpoint), and we expect they could be again in the future. Preferreds should benefit from continued strong credit quality, reliably earning coupons—many of them tax-advantaged—over time. However, at current levels they are potentially more sensitive to changes in market sentiment than they were six months ago.

 

 

 

1 

June 1, 2016—August 31, 2016

2 

Following the methodology required by the Securities and Exchange Commission, total return assumes dividend reinvestment.


As always, we encourage you to visit the Fund’s website, www.preferredincome.com for timely and important information.

Sincerely,

The Flaherty & Crumrine Portfolio Management Team

September 30, 2016

 

2


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OVERVIEW

August 31, 2016 (Unaudited)

 

Fund Statistics       
Net Asset Value   $ 25.78   
Market Price   $ 25.03   
Discount     2.91
Yield on Market Price     7.67
Common Stock Shares Outstanding     19,157,469   

 

Moody’s Ratings*   % of Net Assets†  
A     2.0%   
BBB     54.8%   
BB     29.9%   
Below “BB”     3.6%   
Not Rated**     6.8%   
Below Investment Grade***     34.0%   

 

* Ratings are from Moody’s Investors Service, Inc. “Not Rated” securities are those with no ratings available from Moody’s.
** Does not include net other assets and liabilities of 2.9%.
*** 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%   
Bank of America Corporation     4.6%   
Liberty Mutual Group     4.5%   
MetLife     4.2%   
Morgan Stanley     3.8%   
Fifth Third Bancorp     3.6%   
M&T Bank Corporation     3.3%   
PNC Financial Services Group     3.3%   
JPMorgan Chase     3.2%   

AXA SA

    2.6%   
 
% of Net Assets****†  
Holdings Generating Qualified Dividend Income (QDI) for Individuals     63%   
Holdings Generating Income Eligible for the Corporate Dividends Received Deduction (DRD)     48%   

 

**** 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, 2016 (Unaudited)

 

 

Shares/$ Par        

    Value    

   

 

 

 

Preferred Securities — 94.7%

   
       

Banking — 52.9%

               
  7,000     

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

  $ 7,434,875  
  103,166     

Astoria Financial Corp., 6.50%, Series C

    2,776,455  
$ 1,738,000     

Australia & New Zealand Banking Group Ltd., 6.75%, 144A****

    1,956,974 **(2)   
$ 1,000,000     

Banco Bilbao Vizcaya Argentaria SA, 9.00%, 144A****

    1,048,750 **(2)   
 

Bank of America Corporation:

   
  40,000     

6.00%, Series EE

    1,080,000  
$ 1,800,000     

6.30%, Series DD

    1,971,000  
$ 9,107,000     

6.50%, Series Z

    9,938,924 *(1)   
$ 7,350,000     

8.00%, Series K

    7,570,500 *(1)   
$ 13,105,000     

8.125%, Series M

    13,512,539 *(1)   
  60,000     

Barclays Bank PLC, 7.10%, Series 3

    1,547,400 **(2)   
 

BNP Paribas:

  

 
$ 7,800,000     

7.375%, 144A****

    7,946,250 **(1)(2)   
$ 2,000,000     

7.625%, 144A****

    2,108,000 **(2)   
  76,704     

Capital One Financial Corporation, 6.70%, Series D

    2,203,131 *(1)   
 

Citigroup, Inc.:

  

 
  1,170,807     

6.875%, Series K

    34,670,522 *(1)   
  24,371     

7.125%, Series J

    740,452  
$ 5,000,000     

Citizens Financial Group, Inc., 5.50%

    4,962,500 *(1)   
 

CoBank ACB:

  

 
  38,100     

6.20%, Series H, 144A****

    3,998,119  
  3,450     

6.25%, Series F, 144A****

    368,395  
$ 550,000     

6.25%, Series I, 144A****

    596,799  
  813,953     

Fifth Third Bancorp, 6.625%, Series I

    26,455,507 *(1)   
  5,000     

First Horizon National Corporation, 6.20%, Series A

    130,912  
  23,083     

First Republic Bank, 6.20%, Series B

    606,910  
 

Goldman Sachs Group:

  

 
  10,000     

5.50%, Series J

    271,425  
$ 1,170,000     

5.70%, Series L

    1,196,618  
  54,609     

6.30%, Series N

    1,515,946  
  531,522     

6.375%, Series K

    15,531,073 *(1)   
 

HSBC PLC:

  

 
$ 4,458,000     

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

    6,760,557 (1)(2)   
$ 3,988,000     

HSBC Holdings PLC, 6.875%

    4,182,415 **(1)(2)   
  332,000     

Huntington Bancshares, Inc., 6.25%, Series D

    9,260,310 *(1)   
  133,400     

ING Groep NV, 6.375%

    3,428,380 **(1)(2)   

 

4


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2016 (Unaudited)

 

 

Shares/$ Par        

    Value    

   

 

 

 

Preferred Securities — (Continued)

   
       

Banking — (Continued)

               
 

JPMorgan Chase & Company:

  

 
$ 10,700,000     

6.00%, Series R

  $ 11,306,690 *(1)   
$ 8,000,000     

6.75%, Series S

    9,031,680 *(1)   
$ 3,331,000     

7.90%, Series I

    3,460,076 *(1)   
  34,219     

KeyCorp, 8.625%, Series C

    896,538  
$ 14,022,000     

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

    15,634,530 **(1)(2)   
 

M&T Bank Corporation:

  

 
$ 15,425,000     

6.450%, Series E

    17,237,438 *(1)   
$ 6,789,000     

6.875%, Series D, 144A****

    6,848,404 *(1)   
 

Morgan Stanley:

  

 
  674,994     

6.875%, Series F

    20,216,070 *(1)   
  241,200     

7.125%, Series E

    7,381,323 *(1)   
 

PNC Financial Services Group, Inc.:

  

 
  354,580     

6.125%, Series P

    10,741,115 *(1)   
$ 11,748,000     

6.75%, Series O

    13,275,240 *(1)   
$ 8,625,000     

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

    10,560,234 (1)(2)   
  627,170     

Regions Financial Corporation, 6.375%, Series B

    18,521,898 *(1)   
 

Royal Bank of Scotland Group PLC:

  

 
$ 4,825,000     

RBS Capital Trust II, 6.425%

    5,126,563 **(1)(2)   
  538,500     

7.25%, Series T

    13,672,515 **(1)(2)   
$ 5,000,000     

Societe Generale SA, 8.00%, 144A****

    5,106,250 **(1)(2)   
$ 5,835,000     

Standard Chartered PLC, 7.50%, 144A****

    5,843,753 **(2)   
  26,174     

State Street Corporation, 5.90%, Series D

    748,118 *(1)   
  288,008     

SunTrust Banks, Inc., 5.875%, Series E

    7,506,208 *(1)   
  97,150     

US Bancorp, 6.50%, Series F

    3,036,180 *(1)   
  50,000     

Valley National Bancorp, 6.25%, Series A

    1,477,500  
 

Wells Fargo & Company:

  

 
  180,300     

5.85%, Series Q

    5,068,684 *(1)   
$ 9,025,000     

7.98%, Series K

    9,555,219 *(1)   
 

Zions Bancorporation:

  

 
  10,000     

6.30%, Series G

    320,225  
$ 10,000,000     

7.20%, Series J

    10,675,000 *(1)   

 

 

   
      389,019,089     
   

 

 

   
       

Financial Services — 0.4%

               
$ 1,440,000     

AerCap Global Aviation Trust, 6.50% 06/15/45, 144A****

    1,486,800 (2)   
 

Charles Schwab Corporation:

  

 
  4,300     

5.95%, Series D

    118,218  
  55,700     

6.00%, Series C

    1,533,003 *(1)   

 

 

   
      3,138,021     
   

 

 

   

 

5


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2016 (Unaudited)

 

 

Shares/$ Par        

    Value    

   

 

 

 

Preferred Securities — (Continued)

   
       

Insurance — 25.9%

               
  373,578     

Allstate Corp., 6.625%, Series E

  $ 10,524,626 *(1)   
 

American International Group:

  

 
$ 280,000     

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

    350,700     
$ 497,000     

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

    657,282     
$ 350,000     

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

    459,375     
$ 1,010,000     

Aon Corporation, 8.205% 01/01/27

    1,343,300     
  317,980     

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

    8,424,085 **(1)(2)   
 

AXA SA:

  

 
$ 6,550,000     

6.379%, 144A****

    7,172,250 **(1)(2)   
$ 8,500,000     

8.60% 12/15/30

    11,976,075 (1)(2)   
  646,952     

Axis Capital Holdings Ltd., 6.875%, Series C

    16,925,882 **(1)(2)   
$ 5,000,000     

Catlin Insurance Company Ltd., 7.249%, 144A****

    3,862,500 (1)(2)   
  6,000     

Delphi Financial Group, 7.376% 05/15/37

    133,875     
  47,000     

Endurance Specialty Holdings, 6.35%, Series C

    1,309,890 **(2)   
$ 988,000     

Everest Re Holdings, 6.60% 05/15/37

    805,220 (1)   
  137,500     

Hartford Financial Services Group, Inc., 7.875%

    4,339,844 (1)   
 

Liberty Mutual Group:

  

 
$ 17,950,000     

7.80% 03/15/37, 144A****

    20,866,875 (1)   
$ 8,195,000     

10.75% 06/15/58, 144A****

    12,394,938 (1)   
 

MetLife:

  

 
$ 3,759,000     

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

    6,061,388 (1)   
$ 17,200,000     

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

    24,631,776 (1)   
 

PartnerRe Ltd.:

   
  77,450     

5.875%, Series I

    2,137,620 **(1)(2)   
  37,556     

6.50%, Series G

    1,093,255 **(1)(2)   
  252,464     

7.25%, Series H

    7,940,624 **(1)(2)   
 

Prudential Financial, Inc.:

  

 
$ 5,574,000     

5.625% 06/15/43

    5,985,083 (1)   
$ 5,848,000     

5.875% 09/15/42

    6,483,970 (1)   
 

QBE Insurance:

   
$ 10,900,000     

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

    12,412,375 (1)(2)   
 

Unum Group:

   
$ 1,750,000     

Provident Financing Trust I, 7.405% 03/15/38

    1,964,975     
 

W.R. Berkley Corporation:

  

 
  229,926     

5.625% 04/30/53

    5,978,651 (1)   
  100,020     

5.75% 06/01/56

    2,625,775 (1)   
  1,530     

5.90% 03/01/56

    40,759     
 

XL Group PLC:

   
$ 14,850,000     

XL Capital Ltd., 6.50%, Series E

    11,152,350 (1)(2)   

 

 

   
      190,055,318     
   

 

 

   

 

6


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2016 (Unaudited)

 

 

Shares/$ Par        

    Value    

   

 

 

 

Preferred Securities — (Continued)

   
       

Utilities — 5.6%

               
 

Commonwealth Edison:

   
$ 2,000,000     

COMED Financing III, 6.35% 03/15/33

  $ 2,132,786     
  381,000     

Dominion Resources, Inc., 5.25% 07/30/76, Series A

    9,815,512     
  100,000     

DTE Energy Company, 5.375% 06/01/76, Series B

    2,621,250 (1)   
$ 6,830,000     

Emera, Inc, 6.75% 06/15/76, Series 2016A

    7,398,550 (1)(2)   
  121,452     

Integrys Energy Group, Inc., 6.00%

    3,340,234 (1)   
 

PPL Corp:

   
$ 8,500,000     

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

    7,380,618 (1)   
$ 5,500,000     

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

    4,719,715 (1)   
  50,000     

SCE Trust V, 5.45%, Series K

    1,483,125 *(1)   
$ 2,000,000     

Southern California Edison Co., 6.25%, Series E

    2,249,160  

 

 

   
      41,140,950     
   

 

 

   
       

Energy — 5.2%

               
$ 9,780,000     

DCP Midstream LLC, 5.85% 05/21/43, 144A****

    7,530,600 (1)   
$ 19,804,000     

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

    16,907,665 (1)   
 

Enterprise Products Operating L.P.:

  

 
$ 3,675,000     

7.034% 01/15/68, Series B

    3,909,667 (1)   
$ 3,750,000     

8.375% 08/01/66, Series A

    3,520,312 (1)   
  94,595     

Kinder Morgan, Inc., 9.75%, Series A

    4,746,777  
$ 1,500,000     

Transcanada Pipelines, Ltd., 5.875% 08/15/76, Series 2016A

    1,602,188 (2)   

 

 

   
      38,217,209     
   

 

 

   
       

Real Estate Investment Trust (REIT) — 2.8%

               
  425,148     

Alexandria Real Estate, 6.45%, Series E

    10,968,818 (1)   
 

National Retail Properties, Inc.:

  

 
  45,300     

5.70%, Series E

    1,208,717 (1)   
  48,284     

6.625%, Series D

    1,250,676 (1)   
 

PS Business Parks, Inc.:

  

 
  22,908     

5.70%, Series V

    603,912     
  20,867     

5.75%, Series U

    540,247     
  120,658     

6.00%, Series T

    3,179,338 (1)   
  70,524     

6.45%, Series S

    1,829,569 (1)   
  47,489     

Regency Centers Corporation, 6.625%, Series 6

    1,235,308     

 

 

   
      20,816,585     
   

 

 

   

 

7


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2016 (Unaudited)

 

 

Shares/$ Par        

    Value    

   

 

 

 

Preferred Securities — (Continued)

   
       

Miscellaneous Industries — 1.9%

               
 

BHP Billiton Limited:

   
$ 1,400,000     

BHP Billiton Finance U.S.A., Ltd., 6.75% 10/19/75, 144A****

  $ 1,601,250 (2)   
$ 11,700,000     

Land O’ Lakes, Inc., 8.00%, 144A****

    12,445,875 *(1)   

 

 

   
      14,047,125     
   

 

 

   
 

Total Preferred Securities
(Cost $658,493,143)

    696,434,297     
   

 

 

   

 

Corporate Debt Securities — 2.3%

   
       

Banking — 1.9%

               
  422,286     

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

    11,018,497 (1)   
  89,000     

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

    2,744,092     

 

 

   
  13,762,589     
   

 

 

   
       

Communication — 0.3%

               
 

Qwest Corporation:

   
  84,000     

6.50% 09/01/56

    2,180,002     
  16,000     

6.625% 09/15/55

    424,360     

 

 

   
      2,604,362     
   

 

 

   
       

Miscellaneous Industries — 0.1%

               
  25,000     

eBay, Inc., 6.00% 02/01/56

    686,062     

 

 

   
      686,062     
   

 

 

   
 

Total Corporate Debt Securities
(Cost $15,772,363)

    17,053,013     
   

 

 

   

 

Common Stock — 1.7%

   
       

Energy — 1.7%

               
  555,315     

Kinder Morgan, Inc.

    12,133,633  

 

 

   
      12,133,633     
   

 

 

   
 

Total Common Stock
(Cost $9,576,730)

    12,133,633     
   

 

 

   

 

8


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2016 (Unaudited)

 

 

Shares/$ Par        

    Value    

   

 

 
  Money Market Fund — 0.2%                
 

BlackRock Liquidity Funds:

   
  1,646,905     

T-Fund, Institutional Class

  $ 1,646,905     

 

 

   
 

Total Money Market Fund
(Cost $1,646,905)

    1,646,905     
   

 

 

   

 

 

 

Total Investments (Cost $685,489,141***)

     98.9%        727,267,848   

Other Assets And Liabilities (Net)

     1.1%        7,951,065   
  

 

 

   

 

 

 

Total Managed Assets

         100.0% ‡    $ 735,218,913   
  

 

 

   

 

 

 

Loan Principal Balance

  

    (241,300,000
    

 

 

 

Total Net Assets Available To Common Stock

  

  $ 493,918,913   
    

 

 

 

 

* 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, 2016, these securities amounted to $181,625,111 or 24.7% 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 $453,664,494 at August 31, 2016.

(2) 

Foreign Issuer.

The percentage shown for each investment category is the total value of that category as a percentage of total managed assets.

 

9


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

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

For the period from December 1, 2015 through August 31, 2016 (Unaudited)

 

 

     Value  

OPERATIONS:

  

Net investment income

   $ 26,989,545   

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

     868,938   

Change in net unrealized appreciation/(depreciation) of investments

     25,718,798   
  

 

 

 

Net increase in net assets resulting from operations

     53,577,281   

DISTRIBUTIONS:

  

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

     (27,586,206
  

 

 

 

Total Distributions to Common Stock Shareholders

     (27,586,206

FUND SHARE TRANSACTIONS:

  

Increase from shares issued under the Dividend Reinvestment and
Cash Purchase Plan

     16,481   
  

 

 

 

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

     16,481   

NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK

  

 

 

 

FOR THE PERIOD

   $ 26,007,556   
  

 

 

 
       

NET ASSETS AVAILABLE TO COMMON STOCK:

  

Beginning of period

   $ 467,911,357   

Net increase in net assets during the period

     26,007,556   
  

 

 

 

End of period

   $ 493,918,913   
  

 

 

 

 

(1) 

These tables summarize the nine months ended August 31, 2016 and should be read in conjunction with the Fund’s audited financial statements, including notes to financial statements, in its Annual Report dated November 30, 2015.

(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, 2015 through August 31, 2016 (Unaudited)

For a Common Stock share outstanding throughout the period

 

 

PER SHARE OPERATING PERFORMANCE:

  

Net asset value, beginning of period

   $ 24.43    
  

 

 

 

INVESTMENT OPERATIONS:

  

Net investment income

     1.41   

Net realized and unrealized gain/(loss) on investments

     1.38   
  

 

 

 

Total from investment operations

     2.79   
  

 

 

 

DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:

  

From net investment income

     (1.44
  

 

 

 

Total distributions to Common Stock Shareholders

     (1.44
  

 

 

 

Net asset value, end of period

   $ 25.78   
  

 

 

 

Market value, end of period

   $ 25.03   
  

 

 

 

Common Stock shares outstanding, end of period

     19,157,469   
  

 

 

 

RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:

  

Net investment income†

     7.75 %* 

Operating expenses including interest expense

     1.82 %* 

        Operating expenses excluding interest expense

     1.12 %* 

SUPPLEMENTAL DATA:††

  

Portfolio turnover rate

     11 %** 

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

   $ 735,219   

Ratio of operating expenses including interest expense to total managed assets

     1.20 %* 

Ratio of operating expenses excluding interest expense to total managed assets

     0.73 %* 

 

 

(1) 

These tables summarize the nine months ended August 31, 2016 and should be read in conjunction with the Fund’s audited financial statements, including notes to financial statements, in its Annual Report dated November 30, 2015.

* Annualized.
** Not annualized.
The net investment income ratio reflects 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, 2015

   $ 0.1600       $ 24.20       $ 22.90       $ 22.87   

January 29, 2016

     0.1600         23.73         23.19         22.85   

February 29, 2016

     0.1600         23.14         22.64         22.68   

March 31, 2016

     0.1600         23.72         23.54         23.44   

April 29, 2016

     0.1600         23.99         23.96         23.99   

May 31, 2016

     0.1600         24.49         23.97         24.02   

June 30, 2016

     0.1600         24.64         24.25         24.46   

July 29, 2016

     0.1600         25.36         24.96         24.92   

August 31, 2016

     0.1600         25.78         25.03         25.03   

 

(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, 2016, the aggregate cost of securities for federal income tax purposes was $691,609,149, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $53,128,277 and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $17,469,578.

 

2. Additional Accounting Standards

Fair Value Measurements: The Fund has analyzed all existing investments 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.

 

13


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

 

 

A summary of the inputs used to value the Fund’s investments as of August 31, 2016 is as follows:

 

     Total
Value at
August 31, 2016
     Level 1
Quoted
Price
     Level 2
Significant
Observable
Inputs
     Level 3
Significant
Unobservable
Inputs
 

Preferred Securities

           

Banking

   $ 389,019,089       $ 328,681,919       $ 60,337,170       $   

Financial Services

     3,138,021         1,651,221         1,486,800           

Insurance

     190,055,318         116,114,953         73,940,365           

Utilities

     41,140,950         32,039,289         9,101,661           

Energy

     38,217,209         13,778,944         24,438,265           

Real Estate Investment Trust (REIT)

     20,816,585         20,816,585                   

Miscellaneous Industries

     14,047,125         1,601,250         12,445,875           

Corporate Debt Securities

           

Banking

     13,762,589         13,762,589                   

Communication

     2,604,362         2,604,362                   

Miscellaneous Industries

     686,062         686,062                   

Common Stock

           

Energy

     12,133,633         12,133,633                   

Money Market Fund

     1,646,905         1,646,905                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments

   $ 727,267,848       $ 545,517,712       $ 181,750,136       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 that are approved by the Board of Directors and are 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 market participant.

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


Directors

R. Eric Chadwick, CFA

Chairman of the Board

David Gale

Morgan Gust

Karen H. Hogan

Officers

R. Eric Chadwick, CFA

Chief Executive Officer and

President

Chad C. Conwell

Chief Compliance Officer,

Vice President and Secretary

Bradford S. Stone

Chief Financial Officer,

Vice President and Treasurer

Roger W. Ko

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 Computershare

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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August 31, 2016

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