Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-Q

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED

MANAGEMENT INVESTMENT COMPANY

Investment Company Act file number          811-22762                                 

                             Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated                                 

(Exact name of registrant as specified in charter)

301 E. Colorado Boulevard, Suite 720

                                                 Pasadena, CA 91101                                                 

(Address of principal executive offices) (Zip code)

R. Eric Chadwick

Flaherty & Crumrine Incorporated

301 E. Colorado Boulevard, Suite 720

                                             Pasadena, CA 91101                                             

(Name and address of agent for service)

Registrant’s telephone number, including area code:     626-795-7300         

Date of fiscal year end:    November 30        

Date of reporting period:    August 31, 2017

Form N-Q is to be used by management investment companies, other than small business investment companies registered on Form N-5 (§§ 239.24 and 274.5 of this chapter), to file reports with the Commission, not later than 60 days after the close of the first and third fiscal quarters, pursuant to rule 30b1-5 under the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use the information provided on Form N-Q in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-Q, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-Q unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.


Item 1. Schedule of Investments.

The Schedule(s) of Investments is attached herewith.


FLAHERTY & CRUMRINE DYNAMIC PREFERRED AND INCOME FUND

To the Shareholders of Flaherty & Crumrine Dynamic Preferred and Income Fund (“DFP”):

Fiscal 2017 has been a very good year for preferred securities, and the third fiscal quarter1 continued in stride. Total return2 on net asset value (“NAV”) was 3.1% for the quarter, bringing total return for the first nine months of fiscal 2017 to 16.2%. Total return on market price over the same periods was 4.6% and 22.4%, respectively.

Credit conditions continue to provide a supportive backdrop for yields and spreads, as most issuers of preferreds maintain strong balance sheets. Bank payout ratios (common stock dividends plus share buybacks) are now averaging at or above 100% of current earnings, which means, as a group, banks are no longer adding to their common equity layer of capital. Normally, this could be cause for concern – but given years of balance-sheet strengthening since the financial crisis, these payout ratios are comfortably supported.

Political headlines of all flavors remain omnipresent, including topics such as healthcare reform, tax reform, immigration, and North Korea. Equity and fixed-income markets, however, have largely ignored a lack of near-term progress on these issues and focused on potential for positive economic developments – notably lower taxes and regulatory reform. There are winners and losers in all policy decisions, but markets are pricing in some upside from lower tax rates and reduced regulatory burdens.

Away from these headlines, we have been living in a low-volatility financial environment for quite some time, which has been positive for spreads of most fixed-income products. Mid- to longer-term interest rates generally fell during the quarter, although rates have remained relatively range-bound in recent years. For example, the constant-maturity 10-year Treasury yield, currently around 2.3%, has been within about 0.75% of today’s rate since mid-2011. The economy continues to expand moderately with few signs of higher inflation. As a result, the Federal Reserve is moving very deliberately in removing accommodative monetary policy. The Fed last hiked the federal funds rate in June and has another 0.25% hike penciled in for December. In October, it will begin scaling back reinvestment of Treasury and mortgage-backed securities acquired in the wake of the financial crisis. Although we expect markets will take unwinding of “quantitative easing” in stride, the Fed will be the first major central bank to shrink its balance sheet, and this is a new source of market uncertainty.

Financial regulators in the United Kingdom announced that London banks will no longer be required to submit quotes for LIBOR (London interbank offered rate) after December 31, 2021. Since LIBOR is a reference rate for trillions of dollars of financial instruments – including many floating and fixed-to-floating rate preferred securities – it will be critical to find an alternative benchmark reference rate for instruments continuing past 2021. The Federal Reserve assigned the Alternative Reference Rate Committee (ARRC) to work on a transition from U.S. Dollar LIBOR to a new benchmark reference rate, and they have already identified viable alternatives. Once an alternative is finalized, transition to a new benchmark reference rate will be complicated by the sheer number of instruments involved and mechanics of a change. This process will take time, but we believe market participants have a large incentive to get it right.

 

 

 

1  June 1, 2017—August 31, 2017
2  Following the methodology required by the Securities and Exchange Commission, total return assumes dividend reinvestment.


One of the best places to find total return this quarter was in the primary market. New issue supply has been limited all year, and redemptions of higher-coupon preferred securities have continued at a healthy pace. Many offerings were met with strong demand that exceeded deal size, which in turn pushed prices up. This robust primary market also boosted secondary markets, as prices adjusted to reflect new-issue clearing levels.

During the quarter, a modest drop in interest rates helped lower-coupon securities outperform higher-coupon securities at the margin. Like last quarter, it is difficult to identify laggards in the portfolio this year. Performance lag has been relative return – not absolute negative return – in most cases – typically a result of call (redemption) features embedded in most preferreds. As a security moves above its call price, the call option limits further upside potential as rates or spread move lower. Investors continue to earn coupons, many of which are tax-advantaged, but price increases become more limited.

Looking forward, returns should come mostly from the coupons on securities as the pace of price gains tapers off or even reverses. Compared to fixed-income alternatives, however, preferred securities continue to offer value. Market volatility could increase, and economic or credit conditions could change – which may cause spreads to widen – but we believe preferreds’ combination of credit quality and yield will be difficult to replace in other fixed-income asset classes.

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

Sincerely,

The Flaherty & Crumrine Portfolio Management Team

September 30, 2017

 

2


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OVERVIEW

August 31, 2017 (Unaudited)

 

 

Fund Statistics       
Net Asset Value   $ 26.48  
Market Price   $ 26.45  
Discount     0.11
Yield on Market Price     7.03
Common Stock Shares Outstanding     19,158,288  

 

Moody’s Ratings*   % of Net Assets†  
A     0.2%  
BBB     50.1%  
BB     36.9%  
Below “BB”     1.3%  
Not Rated**     10.6%  
Below Investment Grade***     40.1%  
Senior Debt Rating Below Investment Grade****     1.2%  

 

* 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 0.9%.
*** Below investment grade by all of Moody’s, S&P, and Fitch.
**** Issuer’s senior unsecured debt or issuer rating is 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 Inc     4.6%  
Morgan Stanley     4.3%  
MetLife     4.3%  
Bank of America Corporation     4.2%  
PNC Financial Services Group     4.1%  
Liberty Mutual Group     3.5%  
JPMorgan Chase & Co     3.2%  
Fifth Third Bancorp     2.9%  
Enbridge Energy Partners     2.6%  
Wells Fargo & Company     2.5%  
 
% 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

August 31, 2017 (Unaudited)

 

 

Shares/$ Par        

    Value    

 
 

Preferred Securities — 95.2%

   
       

Banking — 57.8%

               
  103,166    

Astoria Financial Corporation, 6.50%, Series C

  $ 2,667,099 *(1)   
$ 1,738,000    

Australia & New Zealand Banking Group Ltd., 6.75% to 06/15/26 then
ISDA5 + 5.168%, 144A****

    1,946,646 **(2)   
$ 1,200,000    

Banco Bilbao Vizcaya Argentaria SA, 9.00% to 05/09/18 then
SW5 + 8.262%, 144A****

    1,248,040 **(2)   
$ 1,660,000    

Banco Mercantil del Norte SA, 7.625% to 01/06/28 then T10Y + 5.353%, 144A****

    1,791,970 **(2)   
 

Bank of America Corporation:

   
  40,000    

6.00%, Series EE

    1,074,000  
$ 1,800,000    

6.30% to 03/10/26 then 3ML + 4.553%, Series DD

    2,031,750 *(1)   
$ 9,107,000    

6.50% to 10/23/24 then 3ML + 4.174%, Series Z

    10,279,526 *(1)   
$ 3,350,000    

8.00% to 01/30/18 then 3ML + 3.63%, Series K

    3,414,990 *(1)   
$ 14,105,000    

8.125% to 05/15/18 then 3ML + 3.64%, Series M

    14,602,201 *(1)   
$ 5,613,000    

Barclays Bank PLC, 7.875% to 03/15/22 then SW5 + 6.772%, 144A****

    6,117,884 **(2)   
 

BNP Paribas:

   
$ 11,200,000    

7.375% to 08/19/25 then SW5 + 5.15%, 144A****

    12,656,000 **(1)(2)   
$ 2,000,000    

7.625% to 03/30/21 then SW5 + 6.314%, 144A****

    2,192,500 **(2)   
 

Capital One Financial Corporation:

   
  25,700    

6.00%, Series H

    682,656  
  66,679    

6.70%, Series D

    1,814,502 *(1)   
 

Citigroup, Inc.:

   
  1,170,807    

6.875% to 11/15/23 then 3ML + 4.13%, Series K

    33,886,082 *(1)   
  24,371    

7.125% to 09/30/23 then 3ML + 4.04%, Series J

    718,028  
$ 5,000,000    

Citizens Financial Group, Inc., 5.50% to 04/06/20 then 3ML + 3.96%

    5,231,250 *(1)   
 

CoBank ACB:

   
  38,100    

6.20% to 01/01/25 then 3ML + 3.744%, Series H, 144A****

    4,099,324  
  3,450    

6.25% to 10/01/22 then 3ML + 4.557%, Series F, 144A****

    372,277  
$ 550,000    

6.25% to 10/01/26 then 3ML + 4.66%, Series I, 144A****

    606,834  
  7,000    

Compeer Financial ACA, 6.75% to 08/15/23 then 3ML + 4.58%, 144A****

    7,497,000  
  724,983    

Fifth Third Bancorp, 6.625% to 12/31/23 then 3ML + 3.71%, Series I

    21,570,057 *(1)   
  5,000    

First Horizon National Corporation, 6.20%, Series A

    129,412  
 

Goldman Sachs Group:

   
  10,000    

5.50% to 05/10/23 then 3ML + 3.64%, Series J

    269,625  
$ 1,170,000    

5.70% to 05/10/19 then 3ML + 3.884%, Series L

    1,212,412  
  54,609    

6.30%, Series N

    1,475,535  
  531,522    

6.375% to 05/10/24 then 3ML + 3.55%, Series K

    15,419,453 *(1)   

 

4


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2017 (Unaudited)

 

 

Shares/$ Par        

    Value    

 
 

Preferred Securities — (Continued)

   
       

Banking — (Continued)

               
 

HSBC Holdings PLC:

   
$ 4,458,000    

HSBC Capital Funding LP, 10.176% to 06/30/30 then 3ML + 4.98%, 144A****

  $ 7,102,129 (1)(2)   
$ 1,000,000    

HSBC Holdings PLC, 6.00% to 05/22/27 then ISDA5 + 3.746%

    1,054,000 **(2)   
$ 3,988,000    

HSBC Holdings PLC, 6.875% to 06/01/21 then ISDA5 + 5.514%

    4,348,914 **(1)(2)   
  332,000    

Huntington Bancshares, Inc., 6.25%, Series D

    9,227,110 *(1)   
  114,400    

ING Groep NV, 6.375%

    2,954,952 **(1)(2)   
 

JPMorgan Chase & Company:

   
$ 10,700,000    

6.00% to 08/01/23 then 3ML + 3.30%, Series R

    11,609,500 *(1)   
$ 8,000,000    

6.75% to 02/01/24 then 3ML + 3.78%, Series S

    9,150,000 *(1)   
$ 3,331,000    

7.90% to 04/30/18 then 3ML + 3.47%, Series I

    3,435,094 *(1)   
  283,700    

KeyCorp, 6.125% to 12/15/26 then 3ML + 3.892%, Series E

    8,335,815 *(1)   
$ 14,022,000    

Lloyds Banking Group PLC, 6.657% to 05/21/37 then 3ML + 1.27%, 144A****

    16,072,717 **(1)(2)   
$ 15,425,000    

M&T Bank Corporation, 6.45% to 02/15/24 then 3ML + 3.61%, Series E

    17,353,125 *(1)   
$ 1,700,000    

Macquarie Bank Ltd., 6.125% to 03/08/27 then SW5 + 3.703%, 144A****

    1,755,250 **(2)   
 

Morgan Stanley:

   
  200,500    

5.85% to 04/15/27 then 3ML + 3.491%, Series K

    5,466,131  
  674,994    

6.875% to 01/15/24 then 3ML + 3.94%, Series F

    19,650,763 *(1)   
  241,200    

7.125% to 10/15/23 then 3ML + 4.32%, Series E

    7,099,119 *(1)   
  549,300    

New York Community Bancorp, Inc., 6.375% to 03/17/27 then
3ML + 3.821%, Series A

    16,127,448  
  35,000    

People’s United Financial, 5.625% to 12/15/26 then 3ML + 4.02%, Series A

    941,587  
 

PNC Financial Services Group, Inc.:

   
  686,880    

6.125% to 05/01/22 then 3ML + 4.067%, Series P

    19,570,928 *(1)   
$ 9,928,000    

6.75% to 08/01/21 then 3ML + 3.678%, Series O

    11,255,870 *(1)   
$ 8,625,000    

RaboBank Nederland, 11.00% to 06/30/19 then 3ML + 10.868%, 144A****

    9,929,531 (1)(2)   
  627,170    

Regions Financial Corporation, 6.375% to 09/15/24 then 3ML + 3.536%, Series B

    17,844,554 *(1)   
 

Royal Bank of Scotland Group PLC:

   
$ 4,825,000    

RBS Capital Trust II, 6.425% to 01/03/34 then 3ML + 1.9425%

    5,645,250 **(1)(2)   
 

Societe Generale SA:

   
$ 8,200,000    

7.375% to 09/13/21 then SW5 + 6.238%, 144A****

    8,886,750 **(1)(2)   
$ 5,000,000    

8.00% to 09/29/25 then ISDA5 + 5.873%, 144A****

    5,762,500 **(1)(2)   
 

Sovereign Bancorp:

   
  4,000    

Sovereign REIT, 12.00%, Series A, 144A****

    5,015,000    
 

Standard Chartered PLC:

   
$ 5,835,000    

7.50% to 04/02/22 then SW5 + 6.301%, 144A****

    6,332,725 **(1)(2)   
$ 4,000,000    

7.75% to 04/02/23 then SW5 + 5.723%, 144A****

    4,370,000 **(2)   

 

5


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2017 (Unaudited)

 

 

Shares/$ Par        

    Value    

 
 

Preferred Securities — (Continued)

   
       

Banking — (Continued)

               
  26,174    

State Street Corporation, 5.90% to 03/15/24 then 3ML + 3.108%, Series D

  $ 731,629 *(1)   
  288,008    

SunTrust Banks, Inc., 5.875%, Series E

    7,321,883 *(1)   
  43,095    

US Bancorp, 6.50% to 01/15/22 then 3ML + 4.468%, Series F

    1,252,879 *(1)   
  50,000    

Valley National Bancorp, 6.25% to 06/30/25 then 3ML + 3.85%, Series A

    1,442,500  
 

Wells Fargo & Company:

   
  27,000    

5.625%, Series Y

    701,798  
  180,300    

5.85% to 09/15/23 then 3ML + 3.09%, Series Q

    4,899,202 *(1)   
$ 13,025,000    

7.98% to 03/15/18 then 3ML + 3.77%, Series K

    13,432,031 *(1)   
 

Zions Bancorporation:

   
  10,000    

6.30% to 03/15/23 then 3ML + 4.24%, Series G

    275,625  
$ 10,000,000    

7.20% to 09/15/23 then 3ML + 4.44%, Series J

    11,037,500 *(1)   

 

 

   
      432,398,862    
   

 

 

   
        Financial Services — 0.3%                
$ 1,440,000    

AerCap Global Aviation Trust, 6.50% to 06/15/25 then
3ML + 4.30%, 06/15/45, 144A****

    1,562,400 (1)(2)   
 

Charles Schwab Corporation:

   
  4,300    

5.95%, Series D

    117,702  
  27,786    

6.00%, Series C

    762,239 *(1)   

 

 

   
      2,442,341    
   

 

 

   
       

Insurance — 22.4%

               
  373,578    

Allstate Corporation, 6.625%, Series E

    10,091,276 *(1)   
 

American International Group:

   
$ 280,000    

AIG Life Holdings, Inc., 7.57% 12/01/45, 144A****

    349,300    
$ 497,000    

AIG Life Holdings, Inc., 8.125% 03/15/46, 144A****

    664,737    
$ 350,000    

American International Group, Inc., 8.175% to 05/15/38 then
3ML + 4.195%, 05/15/58

    476,875    
$ 680,000    

Aon Corporation, 8.205% 01/01/27

    894,200    
 

Arch Capital Group, Ltd.:

   
  38,000    

5.25%, Series E

    940,595 **(2)   
  33,000    

5.45%, Series F

    834,900 **(2)   
  317,980    

6.75%, Series C

    8,211,039 **(1)(2)   
$ 6,550,000    

AXA SA, 6.379% to 12/14/36 then 3ML + 2.256%, 144A****

    7,503,811 **(1)(2)   
  306,000    

Delphi Financial Group, 3ML + 3.19%, 4.505%(3) 05/15/37

    6,368,625    
  133,500    

Endurance Specialty Holdings, 6.35%, Series C

    3,574,129 **(1)(2)   
$ 988,000    

Everest Reinsurance Holdings, 3ML + 2.385%, 3.70%(3) 05/15/37

    926,250 (1)   

 

6


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2017 (Unaudited)

 

 

Shares/$ Par        

    Value    

 
 

Preferred Securities — (Continued)

   
       

Insurance — (Continued)

               
  137,500    

Hartford Financial Services Group, Inc., 7.875% to 04/15/22 then
3ML + 5.596%, 04/15/42

  $ 4,216,094 (1)   
$ 20,983,000    

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

    26,569,724 (1)   
 

MetLife, Inc.:

   
$ 17,200,000    

9.25% 04/08/38, 144A****

    25,585,000 (1)   
$ 3,759,000    

10.75% 08/01/39

    6,324,518 (1)   
 

PartnerRe Ltd.:

   
  77,450    

5.875%, Series I

    2,000,534 **(1)(2)   
  37,556    

6.50%, Series G

    1,014,388 **(1)(2)   
  246,349    

7.25%, Series H

    7,203,861 **(1)(2)   
 

Prudential Financial, Inc.:

   
$ 3,474,000    

5.625% to 06/15/23 then 3ML + 3.92%, 06/15/43

    3,764,948 (1)   
$ 5,848,000    

5.875% to 09/15/22 then 3ML + 4.175%, 09/15/42

    6,469,350 (1)   
$ 13,160,000    

QBE Insurance Group Ltd., 7.50% to 11/24/23 then
SW10 + 6.03%, 11/24/43, 144A****

    15,199,800 (1)(2)   
 

Unum Group:

   
$ 1,750,000    

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

    2,016,875    
 

W.R. Berkley Corporation:

   
  95,479    

5.625% 04/30/53

    2,492,241 (1)   
  216,928    

5.75% 06/01/56

    5,694,902 (1)   
  1,530    

5.90% 03/01/56

    40,407    
 

XL Group Limited:

   
$ 14,338,000    

Catlin Insurance Company Ltd., 3ML + 2.975%, 4.2811%(3), 144A****

    13,872,015 (1)(2)   
$ 4,850,000    

XL Capital Ltd., 3ML + 2.4575%, 3.7611%(3), Series E

    4,537,903 (1)(2)   

 

 

   
      167,838,297    
   

 

 

   
       

Utilities — 5.7%

               
 

Commonwealth Edison:

   
$ 2,545,000    

COMED Financing III, 6.35% 03/15/33

    2,809,044    
  454,000    

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

    11,705,255 (1)   
  60,000    

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

    1,553,544 (1)   
$ 6,830,000    

Emera, Inc., 6.75% to 06/15/26 then 3ML + 5.44%, 06/15/76, Series 2016A

    7,827,135 (1)(2)   
  121,452    

Integrys Energy Group, Inc., 6.00% to 08/01/23 then 3ML + 3.22%, 08/01/73

    3,402,174 (1)   
 

PPL Corp:

   
$ 8,500,000    

PPL Capital Funding, Inc., 3ML + 2.665%, 3.9614%(3) 03/30/67, Series A

    8,393,750 (1)   
$ 5,500,000    

Puget Sound Energy, Inc., 6.974% to 12/01/17 then
3ML + 2.53%, 06/01/67, Series A

    5,362,500 (1)   
 

Southern California Edison:

   
  50,000    

SCE Trust V, 5.45% to 03/15/26 then 3ML + 3.79%, Series K

    1,428,625 *(1)   

 

 

   
      42,482,027    
   

 

 

   

 

7


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2017 (Unaudited)

 

 

Shares/$ Par        

    Value    

 
 

Preferred Securities — (Continued)

   
       

Energy — 6.5%

               
$ 9,780,000    

DCP Midstream LLC, 5.85% to 05/21/23 then 3ML + 3.85%, 05/21/43, 144A****

  $ 9,119,850 (1)   
$ 3,500,000    

Enbridge, Inc., 6.00% to 01/15/27 then 3ML + 3.89%, 01/15/77

    3,711,610 (1)(2)   
$ 19,804,000    

Enbridge Energy Partners LP, 8.05% to 10/01/17 then 3ML + 3.7975%, 10/01/37

    19,804,000 (1)   
 

Enterprise Products Operating L.P.:

   
$ 3,750,000    

3ML + 3.7075%, 5.0181%(3) 08/01/66

    3,764,738 (1)   
$ 3,675,000    

7.034% to 01/15/18 then 3ML + 2.68%, min 7.034%, 01/15/68

    3,746,663 (1)   
$ 2,700,000    

5.25% to 08/16/27 then 3ML + 3.033%, 08/16/77, Series E

    2,708,775    
  94,595    

Kinder Morgan, Inc., 9.75%, 10/26/2018, Series A

    4,021,233  
$ 1,500,000    

Transcanada Pipelines, Ltd., 5.875% to 08/15/26 then
3ML + 4.64%, 08/15/76, Series 2016-A

    1,638,750 (1)(2)   

 

 

   
      48,515,619    
   

 

 

   
       

Real Estate Investment Trust (REIT) — 0.4%

               
  25,300    

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

    646,225 (1)   
 

PS Business Parks, Inc.:

   
  14,307    

5.20%, Series W

    360,715    
  9,945    

5.70%, Series V

    254,915    
  23,486    

5.75%, Series U

    593,726    
  52,879    

6.00%, Series T

    1,344,184 (1)   

 

 

   
      3,199,765    
   

 

 

   
        Miscellaneous Industries — 2.1%                
 

BHP Billiton Limited:

   
$ 1,400,000    

BHP Billiton Finance U.S.A., Ltd., 6.75% to 10/19/25 then
SW5 + 5.093%, 10/19/75, 144A****

    1,627,500 (1)(2)   
 

Land O’ Lakes, Inc.:

   
$ 725,000    

7.25%, Series B, 144A****

    784,813  
$ 11,700,000    

8.00%, Series A, 144A****

    12,943,125 *(1)   

 

 

   
      15,355,438    
   

 

 

   
 

Total Preferred Securities
(Cost $656,959,870)

    712,232,349    
   

 

 

   

 

8


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2017 (Unaudited)

 

 

Shares/$ Par        

    Value    

 
 

Corporate Debt Securities — 2.3%

   
        Banking — 1.8%                
  428,300    

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

  $ 11,001,956 (1)   
  89,000    

Zions Bancorporation, 6.95% to 09/15/23 then 3ML + 3.89%, 09/15/28, Sub Notes

    2,672,786 (1)   

 

 

   
      13,674,742    
   

 

 

   
       

Communication — 0.5%

               
 

Qwest Corporation:

   
  114,100    

6.50% 09/01/56

    2,895,002    
  22,500    

6.75% 06/15/57

    578,531    
  1,298    

6.875% 10/01/54

    33,985    

 

 

   
      3,507,518    
   

 

 

   
 

Total Corporate Debt Securities
(Cost $16,207,758)

    17,182,260    
   

 

 

   
 

Common Stock — 1.4%

   
        Energy — 1.4%                
  555,315    

Kinder Morgan, Inc.

    10,734,239  

 

 

   
      10,734,239    
   

 

 

   
 

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

    10,734,239    
   

 

 

   
 

Money Market Fund — 0.0%

               
 

BlackRock Liquidity Funds:

   
  148,600    

T-Fund, Institutional Class

    148,600    

 

 

   
 

Total Money Market Fund
(Cost $148,600)

    148,600    
   

 

 

   

Total Investments (Cost $682,892,958***)

     98.9%       740,297,448  

Other Assets And Liabilities (Net)

     1.1%       8,316,158  
  

 

 

   

 

 

 

Total Managed Assets

         100.0% ‡    $ 748,613,606  
  

 

 

   

 

 

 

Loan Principal Balance

 

    (241,300,000
    

 

 

 

Total Net Assets Available To Common Stock

 

  $ 507,313,606  
    

 

 

 

 

 

9


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

August 31, 2017 (Unaudited)

 

 

 

* 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, 2017, these securities amounted to $219,537,152 or 29.3% 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 $432,243,323 at August 31, 2017.

(2) 

Foreign Issuer.

(3) 

Represents the rate in effect as of the reporting date.

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

 

    ABBREVIATIONS:

3ML

    3-Month ICE LIBOR USD A/360

ISDA5

    5-year USD ICE Swap Semiannual 30/360

SW5

    5-year USD Swap Semiannual 30/360

SW10

    10-year USD Swap Semiannual 30/360

T10Y

    Federal Reserve H.15 10-Yr Constant Maturity Treasury Semiannual yield

 

10


 

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, 2016 through August 31, 2017 (Unaudited)

 

 

     Value  

OPERATIONS:

  

Net investment income

   $ 24,119,238  

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

     1,924,873  

Change in net unrealized appreciation/(depreciation) of investments

     46,909,369  
  

 

 

 

Net increase in net assets resulting from operations

     72,953,480  

DISTRIBUTIONS:

  

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

     (27,875,030
  

 

 

 

Total Distributions to Common Stock Shareholders

     (27,875,030

FUND SHARE TRANSACTIONS:

  

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

     20,401  
  

 

 

 

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

     20,401  

NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK

  

 

 

 

FOR THE PERIOD

   $ 45,098,851  
  

 

 

 
       

NET ASSETS AVAILABLE TO COMMON STOCK:

  

Beginning of period

   $ 462,214,755  

Net increase in net assets during the period

     45,098,851  
  

 

 

 

End of period

   $ 507,313,606  
  

 

 

 

 

(1) 

These tables summarize the nine months ended August 31, 2017 and should be read in conjunction with the Fund’s audited financial statements, including notes to the financial statements, in its Annual Report dated November 30, 2016.

(2) 

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

 

11


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

FINANCIAL HIGHLIGHTS(1)

For the period from December 1, 2016 through August 31, 2017 (Unaudited)

For a Common Stock share outstanding throughout the period

 

 

PER SHARE OPERATING PERFORMANCE:

  

Net asset value, beginning of period

   $ 24.13  
  

 

 

 

INVESTMENT OPERATIONS:

  

Net investment income

     1.26  

Net realized and unrealized gain/(loss) on investments

     2.55  
  

 

 

 

Total from investment operations

     3.81  
  

 

 

 

DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:

  

From net investment income

     (1.46
  

 

 

 

Total distributions to Common Stock Shareholders

     (1.46
  

 

 

 

Net asset value, end of period

   $ 26.48  
  

 

 

 

Market value, end of period

   $ 26.45  
  

 

 

 

Common Stock shares outstanding, end of period

     19,158,288  
  

 

 

 

RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:

 

Net investment income†

     6.54 %* 

Operating expenses including interest expense

     2.08 %* 

        Operating expenses excluding interest expense

     1.09 %* 

SUPPLEMENTAL DATA:††

  

Portfolio turnover rate

     10 %** 

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

   $ 748,614  

Ratio of operating expenses including interest expense to total managed assets

     1.39 %* 

Ratio of operating expenses excluding interest expense to total managed assets

     0.73 %* 

 

 

(1) 

These tables summarize the nine months ended August 31, 2017 and should be read in conjunction with the Fund’s audited financial statements, including notes to the financial statements, in its Annual Report dated November 30, 2016.

* 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.

 

12


 

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 30, 2016

   $ 0.1800      $ 24.20      $ 23.77      $ 23.75  

January 31, 2017

     0.1600        24.91        24.98        24.91  

February 28, 2017

     0.1600        25.46        24.89        24.80  

March 31, 2017

     0.1600        25.37        24.53        24.68  

April 30, 2017

     0.1600        25.91        25.37        25.46  

May 31, 2017

     0.1600        26.14        25.74        25.75  

June 30, 2017

     0.1600        26.52        26.30        26.40  

July 31, 2017

     0.1600        26.77        26.54        26.55  

August 31, 2017

     0.1550        26.48        26.45        26.48  

 

(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.

 

13


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited)

 

 

1. Aggregate Information for Federal Income Tax Purposes

At August 31, 2017, the aggregate cost of securities for federal income tax purposes was $690,191,157, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $60,438,039 and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $10,331,748.

 

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.

 

14


 

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, 2017 is as follows:

 

     Total
Value at
August 31, 2017
     Level 1
Quoted
Price
     Level 2
Significant
Observable
Inputs
     Level 3
Significant
Unobservable
Inputs
 

Preferred Securities

           

Banking

   $ 432,398,862      $ 375,862,767      $ 56,536,095      $ —    

Financial Services

     2,442,341        879,941        1,562,400        —    

Insurance

     167,838,297        93,472,960        74,365,337        —    

Utilities

     42,482,027        34,310,483        8,171,544        —    

Energy

     48,515,619        19,591,769        28,923,850        —    

Real Estate Investment Trust (REIT)

     3,199,765        3,199,765        —          —    

Miscellaneous Industries

     15,355,438        1,627,500        13,727,938        —    

Corporate Debt Securities

           

Banking

     13,674,742        13,674,742        —          —    

Communication

     3,507,518        3,507,518        —          —    

Common Stock

           

Energy

     10,734,239        10,734,239        —          —    

Money Market Fund

     148,600        148,600        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments

   $ 740,297,448      $ 557,010,284      $ 183,287,164      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

During the reporting period, securities with an aggregate market value of $1,946,646 were transferred into Level 1 from Level 2. The securities were transferred due to an increase in the quantity and quality of information related to trading activity or broker quotes for these securities. During the period, there were no transfers into Level 2 from Level 1. During the reporting period, there were no transfers into or out of Level 3.

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.

 

15


 

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

 

 

3. Subsequent Event

Management has evaluated the impact of all subsequent events in the Fund through the date this quarterly report was issued, and has determined that there was the following subsequent event:

The Fund recently amended its committed financing agreement with BNP Paribas Prime Brokerage International, Ltd. (“Financing Agreement”). Effective September 1, 2017, the lender charges an annualized rate of one-month LIBOR (reset monthly) plus 0.80% on the drawn (borrowed) balance. Prior to that date, the lender charged an annualized rate of three-month LIBOR (reset quarterly) plus 0.90% on the drawn balance. The lender’s charges on the undrawn (committed) balance remain unchanged at an annualized rate of 0.65%. As of September 1, 2017, the committed amount and amount borrowed was $241,300,000. The Financing Agreement may be amended from time to time to allow for changes in the committed amount.

 

16


Directors

R. Eric Chadwick, CFA

Chairman of the Board

Morgan Gust

David Gale

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.

LOGO

Quarterly

Report

August 31, 2017

www.preferredincome.com

 


Item 2. Controls and Procedures.

 

  (a)

The registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).

 

  (b)

There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d))) that occurred during the registrant’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

Item 3. Exhibits.

Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

(Registrant)     Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated    

By (Signature and Title)*        /s/ R. Eric Chadwick                                                                                                   

                                                  R. Eric Chadwick, Chief Executive Officer and President

                                                  (principal executive officer)

Date                                           10/19/2017                                                                                                                   

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By (Signature and Title)*        /s/ R. Eric Chadwick                                                                                                   

                                                  R. Eric Chadwick, Chief Executive Officer and President

                                                  (principal executive officer)

Date                                           10/19/2017                                                                                                                   

By (Signature and Title)*        /s/ Bradford S. Stone                                                                                                   

                                                  Bradford S. Stone, Chief Financial Officer, Treasurer and Vice President

                                                  (principal financial officer)

Date                                           10/24/2017                                                                                                                   

* Print the name and title of each signing officer under his or her signature.