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”):

Increased volatility was a common theme in most markets during the first fiscal quarter1, and the preferred securities market was no exception. Total return2 on net asset value (“NAV”) was -3.3% for the quarter, while total return on market price was 0.6%.

As we mentioned in our last letter, markets entered a new phase with “liftoff” in December. The Federal Reserve’s 0.25% hike in short-term interest rates was its first step in slowly removing unprecedented levels of monetary accommodation. However, other parts of the world, notably Europe and Japan, are still easing monetary policy by increasing quantitative easing (QE) programs and pushing short-term interest rates into negative territory. With concerns over economic growth in China adding to the equation, investors are struggling to figure out how all the pieces fit together going forward. Understandably, markets are factoring in a possibility of policy mistakes along the way, as these are uncharted territories for everyone. The result has been increased volatility in most markets, including commodities (oil, natural gas, and metals), stocks, U.S. Treasuries, corporate bonds, and preferred securities.

Reduced probabilities for future rate increases in the U.S., and negative rates in some regions, triggered an absolute rout in bank common stocks—with the average U.S. bank stock returning -20% during the fiscal period. Preferred securities fared much better but cheapened in sympathy (as did more-senior bank securities). Bank earnings should benefit from higher interest rates, but any upside to future earnings that investors had been hoping for (and pricing into stock prices) has been scaled back from earlier projections.

European bank common stocks were among the worst performers, and this had a related impact on the contingent capital securities market (these “CoCos” are the non-U.S. version of preferreds). Deutsche Bank was in the headlines yet again—this time with concerns about its ability to pay coupons on CoCos and preferred securities. The market reacted very negatively, and CoCo prices were dragged down substantially across the board. Once again, U.S. preferreds fared better but still cheapened in sympathy.

There is a lot for investors in all markets to consider, but as it relates to preferreds, we suggest taking a step back to reflect on a longer-term view of favorable fundamentals.

Bank earnings are certainly important to investors, since dividends are paid out of earnings and profits. However, growth in earnings, while critical to common stock valuation, is not a critical determinant of creditworthiness and preferred-stock valuation. We focus much more on a bank’s capital—on its ability to absorb losses while still being able to pay preferred dividends—than on earnings growth. On this front, the news is positive as the common equity capital at banks in which we invest continues to build, which supports debt and preferred stock that are senior to common equity.

 

 

1  December 1, 2015—February 29, 2016
2  Following the methodology required by the Securities and Exchange Commission, total return assumes dividend reinvestment.


Low interest rates will have mixed implications for both issuers of and investors in preferred securities, but overall they should benefit prices of preferred securities as a global search for yield continues. We also believe recent concerns around CoCos (which represented 1.7% of the Fund as of period end) will turn out to be noise, as issuers and regulators consider CoCos a necessary market that they are loath to damage by not paying coupons.

Global economic recovery will be slow, and policy mistakes are likely to be made. As we have said before, income (coupons) can make up for quite a bit of principal change over time—and preferreds continue to offer higher yields than many other fixed-income securities. While volatility may be with us for some time, and the ride may be bumpy, we believe total returns will be competitive over time for preferred investors.

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

March 31, 2016

 

2


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OVERVIEW

February 29, 2016 (Unaudited)

 

 

Fund Statistics       
Net Asset Value   $ 23.14   
Market Price   $ 22.64   
Discount     2.16
Yield on Market Price     8.48
Common Stock Shares Outstanding     19,156,782   

 

Moody’s Ratings*   % of Net Assets†  
A     2.7%   
BBB     56.4%   
BB     29.4%   
Below “BB”     3.5%   
Not Rated**     6.2%   
Below Investment Grade***     35.0%   

 

* 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 1.8%.
*** 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%   
Liberty Mutual Group     4.6%   
Bank of America Corporation     4.3%   
MetLife     4.1%   
PNC Financial Services Group     3.7%   
Fifth Third Bancorp     3.7%   
Morgan Stanley     3.7%   
M&T Bank Corporation     3.4%   
JPMorgan Chase     3.3%   
Prudential Financial     3.2%   
 
% of Net Assets****†  
Holdings Generating Qualified Dividend Income (QDI) for Individuals     64%   
Holdings Generating Income Eligible for the Corporate Dividends Received Deduction (DRD)     49%   

 

**** 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 29, 2016 (Unaudited)

 

 

Shares/$ Par        

    Value    

     

 

Preferred Securities — 95.7%

   
       

Banking — 52.1%

           
  7,000     

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

  $ 7,758,625 *(1)   
  103,166     

Astoria Financial Corp., 6.50%, Series C

    2,688,764 *(1)   
 

Bank of America Corporation:

   
$ 9,107,000     

6.50%, Series Z

    9,300,524 *(1)   
$ 7,350,000     

8.00%, Series K

    7,359,187 *(1)   
$ 13,105,000     

8.125%, Series M

    13,121,381 *(1)   
  60,000     

Barclays Bank PLC, 7.10%, Series 3

    1,500,000 **(2)   
$ 7,800,000     

BNP Paribas, 7.375%, 144A****

    7,302,750 **(1)(2)   
  41,704     

Capital One Financial Corporation, 6.70%, Series D

    1,107,762  
 

Citigroup, Inc.:

   
  1,170,807     

6.875%, Series K

    31,172,736 *(1)   
  65,022     

7.125%, Series J

    1,733,246  
$ 5,000,000     

Citizens Financial Group, Inc., 5.50%,144A****

    4,690,000 *(1)   
 

CoBank ACB:

   
  38,100     

6.20%, Series H, 144A****

    3,821,906  
  3,450     

6.25%, Series F, 144A****

    355,781  
  893,035     

Fifth Third Bancorp, 6.625%, Series I

    25,312,005 *(1)   
  5,000     

First Horizon National Corporation, 6.20%, Series A

    127,656  
  34,219     

First Niagara Financial Group, Inc., 8.625%, Series B

    904,665 *(1)   
  25,000     

First Republic Bank, 6.20%, Series B

    670,313  
 

Goldman Sachs Group:

   
  10,000     

5.50%, Series J

    247,813  
$ 1,170,000     

5.70%, Series L

    1,121,738  
  48,609     

5.95%, Series I

    1,224,339 *(1)   
  531,522     

6.375%, Series K

    14,127,855 *(1)   
 

HSBC PLC:

   
$ 4,458,000     

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

    6,470,564 (1)(2)   
  44,800     

HSBC Holdings PLC, 8.00%, Series 2

    1,152,202 **(2)   
  340,800     

HSBC USA, Inc., 6.50%, Series H

    8,551,967 *(1)   
 

ING Groep NV:

   
  160,000     

6.375%

    4,016,000 **(1)(2)   
  38,082     

7.05%

    986,564 **(2)   
  3,201     

7.20%

    83,426 **(1)(2)   
 

JPMorgan Chase & Company:

   
$ 10,700,000     

6.00%, Series R

    10,619,750 *(1)   
$ 8,000,000     

6.75%, Series S

    8,490,000 *(1)   
$ 3,331,000     

7.90%, Series I

    3,326,836  
$ 14,022,000     

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

    15,240,161 **(1)(2)   

 

4


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 29, 2016 (Unaudited)

 

 

Shares/$ Par        

    Value    

     

 

Preferred Securities — (Continued)

   
       

Banking — (Continued)

           
 

M&T Bank Corporation:

   
$ 15,425,000     

6.450%, Series E

  $ 16,273,375 *(1)   
$ 6,789,000     

6.875%, Series D, 144A****

    6,818,872 *(1)   
 

Morgan Stanley:

   
  674,994     

6.875%, Series F

    18,238,338 *(1)   
  241,200     

7.125%, Series E

    6,791,300 *(1)   
 

PNC Financial Services Group, Inc.:

   
  451,824     

6.125%, Series P

    12,820,506 *(1)   
$ 11,748,000     

6.75%, Series O

    12,582,108 *(1)   
$ 8,625,000     

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

    10,211,655 (1)(2)   
  627,170     

Regions Financial Corporation, 6.375%, Series B

    16,169,258 *(1)   
 

Royal Bank of Scotland Group PLC:

   
$ 4,825,000     

RBS Capital Trust II, 6.425%

    4,993,875 **(1)(2)   
  13,000     

6.60%, Series S

    315,510 **(2)   
  538,500     

7.25%, Series T

    13,505,580 **(1)(2)   
$ 5,000,000     

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

    4,587,345 **(1)(2)   
  110,317     

State Street Corporation, 5.90%, Series D

    2,909,611 *(1)   
  288,008     

SunTrust Banks, Inc., 5.875%, Series E

    7,407,220 *(1)   
  97,150     

US Bancorp, 6.50%, Series F

    2,814,319 *(1)   
  50,000     

Valley National Bancorp, 6.25%, Series A

    1,367,500  
 

Wells Fargo & Company:

   
  180,300     

5.85%, Series Q

    4,614,562 *(1)   
$ 9,025,000     

7.98%, Series K

    9,295,750 *(1)   
 

Zions Bancorporation:

   
  10,000     

6.30%, Series G

    250,625  
$ 10,000,000     

7.20%, Series J

    10,225,000 *(1)   

 

 

   
      356,778,825     
   

 

 

   
       

Financial Services — 0.8%

           
  60,000     

Charles Schwab Corporation, 6.00%, Series C

    1,548,750  
 

Deutsche Bank:

   
  89,000     

Deutsche Bank Contingent Capital Trust III, 7.60%

    2,163,813 **(1)(2)   
  8,103     

Deutsche Bank Contingent Capital Trust V, 8.05%

    203,335 **(1)(2)   
 

HSBC PLC:

   
  72,515     

HSBC Finance Corporation, 6.36%, Series B

    1,817,407  

 

 

   
      5,733,305     
   

 

 

   

 

5


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 29, 2016 (Unaudited)

 

 

Shares/$ Par        

    Value    

     

 

Preferred Securities — (Continued)

   
       

Insurance — 27.8%

           
  390,981     

Allstate Corp., 6.625%, Series E

  $ 10,764,215 *(1)   
 

American International Group:

   
$ 280,000     

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

    336,700     
$ 497,000     

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

    647,343     
$ 350,000     

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

    437,500     
$ 1,010,000     

Aon Corporation, 8.205% 01/01/27

    1,229,675     
  317,980     

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

    8,555,665 **(1)(2)   
  4,500     

Aspen Insurance Holdings Ltd., 7.401%

    110,110 **(2)   
 

AXA SA:

   
$ 6,550,000     

6.379%, 144A****

    6,821,497 **(1)(2)   
$ 8,500,000     

8.60% 12/15/30

    11,071,250 (1)(2)   
  646,952     

Axis Capital Holdings Ltd., 6.875%, Series C

    17,063,359 **(1)(2)   
  6,000     

Delphi Financial Group, 7.376% 05/15/37

    149,625     
 

Endurance Specialty Holdings:

   
  47,000     

6.35%, Series C

    1,234,690 **(2)   
  181,000     

7.50%, Series B

    4,598,540 **(2)   
$ 988,000     

Everest Re Holdings, 6.60% 05/15/37

    852,150 (1)   
  137,500     

Hartford Financial Services Group, Inc., 7.875%

    4,391,406     
 

Liberty Mutual Group:

   
$ 17,950,000     

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

    19,677,688 (1)   
$ 8,195,000     

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

    11,903,238 (1)   
 

MetLife:

   
$ 3,759,000     

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

    5,563,320 (1)   
$ 17,200,000     

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

    22,403,000 (1)   
 

PartnerRe Ltd.:

   
  77,450     

5.875%, Series F

    2,013,700 **(2)   
  37,556     

6.50%, Series D

    1,036,313 **(2)   
  252,464     

7.25%, Series E

    7,274,119 **(1)(2)   
 

Prudential Financial, Inc.:

   
$ 5,574,000     

5.625% 06/15/43

    5,514,080 (1)   
$ 6,375,000     

5.875% 09/15/42

    6,478,721 (1)   
$ 9,070,000     

8.875% 06/15/38

    9,939,813 (1)   
 

QBE Insurance:

   
$ 10,900,000     

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

    11,908,250 (1)(2)   
 

Unum Group:

   
$ 1,750,000     

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

    2,019,341     

 

6


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 29, 2016 (Unaudited)

 

 

Shares/$ Par        

    Value    

     

 

Preferred Securities — (Continued)

   
       

Insurance — (Continued)

           
 

W.R. Berkley Corporation:

   
  233,946     

5.625%

  $ 5,929,081 (1)   
  1,530     

5.90%

    38,173     
 

XL Group PLC:

   
$ 14,850,000     

XL Capital Ltd., 6.50%, Series E

    10,432,125 (1)(2)   

 

 

   
      190,394,687     
   

 

 

   
       

Utilities — 2.6%

           
 

Commonwealth Edison:

   
$ 2,000,000     

COMED Financing III, 6.35% 03/15/33

    2,098,354     
  121,452     

Integrys Energy Group, Inc., 6.00%

    3,104,617 (1)   
 

PPL Corp:

   
$ 8,500,000     

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

    6,380,670 (1)   
$ 5,500,000     

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

    4,001,250 (1)   
$ 2,000,000     

Southern California Edison Co., 6.25%, Series E

    2,181,000  

 

 

   
      17,765,891     
   

 

 

   
       

Energy — 5.7%

           
$ 9,780,000     

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

    5,232,300 (1)   
$ 15,133,000     

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

    10,328,272 (1)   
 

Enterprise Products Operating L.P.:

   
$ 3,675,000     

7.034% 01/15/68, Series B

    3,600,765 (1)   
$ 3,750,000     

8.375% 08/01/66, Series A

    2,821,875     
  367,950     

Kinder Morgan, Inc., 9.75%, Series A

    16,693,892  

 

 

   
      38,677,104     
   

 

 

   
       

Real Estate Investment Trust (REIT) — 4.4%

           
  425,148     

Alexandria Real Estate, 6.45%, Series E

    11,092,111 (1)   
  88,280     

Equity CommonWealth, 7.25%, Series E

    2,226,316     
 

National Retail Properties, Inc.:

   
  45,300     

5.70%, Series E

    1,157,981     
  127,879     

6.625%, Series D

    3,316,862     

 

7


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 29, 2016 (Unaudited)

 

 

Shares/$ Par        

    Value    

     

 

Preferred Securities — (Continued)

   
       

Real Estate Investment Trust (REIT) — (Continued)

           
 

PS Business Parks, Inc.:

   
  22,908     

5.70%, Series V

  $ 589,881     
  20,867     

5.75%, Series U

    525,222     
  287,476     

6.00%, Series T

    7,307,640 (1)   
  113,810     

6.45%, Series S

    2,948,396 (1)   
  47,489     

Regency Centers Corporation, 6.625%, Series 6

    1,246,586     

 

 

   
      30,410,995     
   

 

 

   
       

Miscellaneous Industries — 2.3%

           
 

BHP Billiton Limited:

   
$ 1,400,000     

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

    1,354,500 (2)   
$ 3,086,000     

General Electric Company, 5.00%, Series D

    3,136,148 *(1)   
$ 10,800,000     

Land O’ Lakes, Inc., 8.00%, 144A****

    11,164,500 *(1)   

 

 

   
      15,655,148     
   

 

 

   
 

Total Preferred Securities
(Cost $663,520,088)

    655,415,955     
   

 

 

   

 

Corporate Debt Securities — 2.4%

   
       

Banking — 1.9%

           
  422,286     

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

    10,227,260 (1)   
  100,000     

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

    2,787,500     

 

 

   
      13,014,760     
   

 

 

   
       

Communication — 0.4%

           
  107,483     

Qwest Corporation, 7.375% 06/01/51

    2,717,310     

 

 

   
      2,717,310     
   

 

 

   
       

Miscellaneous Industries — 0.1%

           
  25,000     

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

    621,250     

 

 

   
      621,250     
   

 

 

   
 

Total Corporate Debt Securities
(Cost $16,299,932)

    16,353,320     
   

 

 

   

 

8


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 29, 2016 (Unaudited)

 

 

Shares/$ Par        

    Value    

     

 

Common Stock — 0.2%

   
       

Energy — 0.2%

           
  63,080     

Kinder Morgan, Inc.

  $ 1,141,117  

 

 

   
      1,141,117     
   

 

 

   
 

Total Common Stock
(Cost $952,508)

    1,141,117     
   

 

 

   
  Money Market Fund — 0.6%            
 

BlackRock Liquidity Funds:

   
  4,505,550     

T-Fund, Institutional Class

    4,505,550     

 

 

   
 

Total Money Market Fund
(Cost $4,505,550)

    4,505,550     
   

 

 

   

Total Investments (Cost $685,278,078***)

     98.9%        677,415,942   

Other Assets And Liabilities (Net)

     1.1%        7,248,932   
  

 

 

   

 

 

 

Total Managed Assets

         100.0% ‡    $ 684,664,874   
  

 

 

   

 

 

 

Loan Principal Balance

  

    (241,300,000
    

 

 

 

Total Net Assets Available To Common Stock

  

  $ 443,364,874   
    

 

 

 

 

* 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 29, 2016, these securities amounted to $158,706,675 or 23.2% 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 $413,898,608 at February 29, 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 February 29, 2016 (Unaudited)

 

 

     Value  

OPERATIONS:

  

Net investment income

   $ 8,799,762   

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

     (228,944

Change in net unrealized appreciation/(depreciation) of investments

     (23,922,045
  

 

 

 

Net decrease in net assets resulting from operations

     (15,351,227

DISTRIBUTIONS:

  

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

     (9,195,256
  

 

 

 

Total Distributions to Common Stock Shareholders

     (9,195,256

NET DECREASE IN NET ASSETS AVAILABLE TO COMMON STOCK

  

 

 

 

FOR THE PERIOD

   $ (24,546,483
  

 

 

 
       

NET ASSETS AVAILABLE TO COMMON STOCK:

  

Beginning of period

   $ 467,911,357   

Net decrease in net assets during the period

     (24,546,483
  

 

 

 

End of period

   $ 443,364,874   
  

 

 

 

 

(1) 

These tables summarize the three months ended February 29, 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 February 29, 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

     0.46   

Net realized and unrealized gain/(loss) on investments

     (1.27
  

 

 

 

Total from investment operations

     (0.81
  

 

 

 

DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:

  

From net investment income

     (0.48
  

 

 

 

Total distributions to Common Stock Shareholders

     (0.48
  

 

 

 

Net asset value, end of period

   $ 23.14   
  

 

 

 

Market value, end of period

   $ 22.64   
  

 

 

 

Common Stock shares outstanding, end of period

     19,156,782   
  

 

 

 

RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:

  

Net investment income†

     7.80 %* 

Operating expenses including interest expense

     1.82 %* 

        Operating expenses excluding interest expense

     1.16 %* 

SUPPLEMENTAL DATA:††

  

Portfolio turnover rate

     2 %** 

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

   $ 684,665   

Ratio of operating expenses including interest expense to total managed assets

     1.19 %* 

Ratio of operating expenses excluding interest expense to total managed assets

     0.76 %* 

 

 

(1) 

These tables summarize the three months ended February 29, 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   

 

(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 29, 2016, the aggregate cost of securities for federal income tax purposes was $691,398,086, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $20,510,936 and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $34,493,080.

 

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 February 29, 2016 is as follows:

 

     Total
Value at
February 29, 2016
     Level 1
Quoted
Price
     Level 2
Significant
Observable
Inputs
     Level 3
Significant
Unobservable
Inputs
 

Preferred Securities

           

Banking

   $ 356,778,825       $ 301,432,547       $ 55,346,278       $   

Financial Services

     5,733,305         5,733,305                   

Insurance

     190,394,687         113,838,117         76,556,570           

Utilities

     17,765,891         9,485,287         8,280,604           

Energy

     38,677,104         23,116,532         15,560,572           

Real Estate Investment Trust (REIT)

     30,410,995         30,410,995                   

Miscellaneous Industries

     15,655,148         4,490,648         11,164,500           

Corporate Debt Securities

           

Banking

     13,014,760         13,014,760                   

Communication

     2,717,310         2,717,310                   

Miscellaneous Industries

     621,250         621,250                   

Common Stock

           

Energy

     1,141,117         1,141,117                   

Money Market Fund

     4,505,550         4,505,550                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments

   $ 677,415,942       $ 510,507,418       $ 166,908,524       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

Robert F. Wulf, CFA

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 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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February 29, 2016

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