FLAHERTY & CRUMRINE DYNAMIC PREFERRED AND INCOME FUND

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

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

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

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

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

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

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

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

 

 

 

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

2	December 1, 2013—February 28, 2014

 

---

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

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

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

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

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

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

Sincerely,

The Flaherty & Crumrine Portfolio Management Team:

R. Eric Chadwick

Donald F. Crumrine

Robert M. Ettinger

Bradford S. Stone

March 31, 2014

 

2

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Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OVERVIEW

February 28, 2014 (Unaudited)

 

		% of Net Assets***†
Holdings Generating Qualified Dividend Income (QDI) for Individuals			54%
Holdings Generating Income Eligible for the Corporate Dividends Received Deduction (DRD)			34%

 

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

†	Net Assets includes assets attributable to the use of leverage.

 

3

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Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS

February 28, 2014 (Unaudited)

 

Shares/$ Par						Value
	Preferred Securities — 97.5%
				Banking — 49.7%
	11,750			AgStar Financial Services ACA, 6.75% Pfd., 144A****		$	11,741,922				*	(1)
	103,166			Astoria Financial Corp., 6.50% Pfd., Series C			2,450,450				*	(1)
				Banco Santander, S.A.:
	296,121			Banco Santander, 10.50% Pfd., Series 10			7,936,487				*	*(1)(2)
				Bank of America:
$	10,000,000			Bank of America Corporation, 8.00%			11,455,590				*	(1)
$	7,110,000			Bank of America Corporation, 8.125%			8,144,007				*	(1)
				Barclays Bank PLC:
$	9,062,000			Barclays Bank PLC, 6.278%			8,940,986				*	*(1)(2)
	60,000			Barclays Bank PLC, 7.10% Pfd.			1,535,400				*	*(2)
$	8,972,000			Barclays Bank PLC, 7.434%, 144A****			10,003,780				*	*(1)(2)
	31,907			Barclays Bank PLC, 8.125% Pfd., Series 5			826,391				*	*(1)(2)
	44,933			BB&T Corporation, 5.625% Pfd., Series E			990,840				*
$	19,300,000			BNP Paribas, 7.195%, 144A****			20,530,375				*	*(1)(2)
				Citigroup:
	1,145,919			Citigroup, Inc., 6.875% Pfd., Series K			29,818,531				*
	85,400			Citigroup, Inc., 7.125% Pfd., Series J			2,275,910				*
				CoBank ACB:
	1,700			CoBank ACB, 6.25% Pfd., 144A****			171,275				*
	175,000			Fifth Third Bancorp, 6.625% Pfd., Series I			4,651,938				*
	33,550			First Niagara Financial Group, Inc., 8.625% Pfd.			949,180				*	(1)
	25,000			First Republic Bank, 6.20% Pfd.			599,813				*
				Goldman Sachs Group:
	172,000			Goldman Sachs, 5.95% Pfd., Series I			3,963,138				*	(1)
$	11,892,000			Goldman Sachs Capital I, 6.345% 02/15/34			12,419,410				(1	)
				HSBC PLC:
$	4,458,000			HSBC Capital Funding LP, 10.176%, 144A****			6,452,955				(1	)(2)
	70,800			HSBC Holdings PLC, 8.00% Pfd., Series 2			1,902,573				*	*(2)
$	3,910,000			HSBC USA Capital Trust I, 7.808% 12/15/26, 144A****			3,973,537
$	1,100,000			HSBC USA Capital Trust II, 8.38% 05/15/27, 144A****			1,118,224
	343,800			HSBC USA, Inc., 6.50% Pfd., Series H			8,584,273				*
				ING Groep NV:
	160,000			ING Groep NV, 6.375% Pfd.			3,936,000				*	*(1)(2)
	38,082			ING Groep NV, 7.05% Pfd.			969,625				*	*(2)
	3,201			ING Groep NV, 7.20% Pfd.			81,634				*	*(1)(2)
	235,000			ING Groep NV, 7.375% Pfd.			6,025,400				*	*(1)(2)
				JPMorgan Chase:
$	10,700,000			JPMorgan Chase & Company, 6.00%, Series R			10,700,000				*	(1)
$	18,500,000			JPMorgan Chase & Company, 7.90%, Series I			20,853,200				*	(1)

 

4

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Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2014 (Unaudited)

 

Shares/$ Par						Value
	Preferred Securities — (Continued)
				Banking — (Continued)
$	14,022,000			Lloyds Banking Group PLC, 6.657%, 144A****		$	14,022,000				*	*(1)(2)
				M&T Bank Corporation:
$	1,500,000			M&T Bank Corporation, 6.450%, Series E			1,558,125				*
$	2,590,000			M&T Bank Corporation, 6.875%, Series D, 144A****			2,594,576				*
				Morgan Stanley:
	2,980			Morgan Stanley Capital Trust III, 6.25% Pfd.			74,299
	39,002			Morgan Stanley Capital Trust IV, 6.25% Pfd.			978,708				(1	)
	368,430			Morgan Stanley, 6.875%, Pfd., Series F			9,534,968				*
	91,200			Morgan Stanley, 7.125%, Pfd., Series E			2,444,297				*
				PNC Financial Services:
	451,824			PNC Financial Services Group, Inc., 6.125% Pfd., Series P			11,802,772				*	(1)
$	11,748,000			PNC Financial Services Group, Inc., 6.75%			12,640,953				*	(1)
$	8,625,000			RaboBank Nederland, 11.00%, 144A****			11,406,563				(1	)(2)
				Royal Bank of Scotland:
$	4,825,000			RBS Capital Trust II, 6.425%			4,674,219				*	*(1)(2)
	13,000			Royal Bank of Scotland Group PLC, 6.60% Pfd., Series S			299,910				*	*(2)
	647,500			Royal Bank of Scotland Group PLC, 7.25% Pfd., Series T			16,187,500				*	*(1)(2)
	318,447			SunTrust Banks, Inc., 5.875% Pfd.			7,145,155				*
	110,000			US Bancorp, 6.50%, Pfd., Series F			3,055,943				*	(1)
$	18,000,000			Wells Fargo & Company, 7.98%, Series K			20,610,000				*	(1)
$	10,000,000			Zions Bancorporation, 7.20%, Series J			10,400,000				*
							333,432,832
				Financial Services — 1.7%
$	5,600,000			Charles Schwab Corporation, 7.00%			6,412,000				*	(1)
				Deutsche Bank:
	89,000			Deutsche Bank Contingent Capital Trust III, 7.60% Pfd.			2,352,493				*	*(1)(2)
	8,103			Deutsche Bank Contingent Capital Trust V, 8.05% Pfd.			220,645				*	*(1)(2)
$	2,000,000			General Electric Capital Corp., 7.125%, Series A			2,273,616				*	(1)
				HSBC PLC:
	8,500			HSBC Finance Corporation, 6.36% Pfd., Series B			206,231				*
							11,464,985

 

5

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Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2014 (Unaudited)

 

Shares/$ Par						Value
	Preferred Securities — (Continued)
				Insurance — 31.6%
				American International Group:
$	4,000,000			AIG Life Holdings, Inc., 7.57%, 144A****		$	4,800,000				(1	)
$	7,100,000			AIG Life Holdings, Inc., 8.125%, 144A****			8,928,250				(1	)
$	5,000,000			American International Group, Inc., 8.175% 05/15/58			6,464,000				(1	)
$	1,010,000			Aon Corporation, 8.205% 01/01/27			1,238,300
	314,127			Arch Capital Group, Ltd., 6.75% Pfd., Series C			7,872,808				*	*(1)(2)
				AXA SA:
$	7,550,000			AXA SA, 6.379%, 144A****			7,870,875				*	*(1)(2)
$	8,950,000			AXA SA, 8.60% 12/15/30			11,567,875				(1	)(2)
				Axis Capital Holdings:
	4,300			Axis Capital Holdings Ltd., 5.50% Pfd., Series D			87,387				*	*(2)
	459,952			Axis Capital Holdings Ltd., 6.875% Pfd., Series C			11,651,734				*	*(1)(2)
	6,000			Delphi Financial Group, 7.376% Pfd. 05/15/37			149,625
	41,000			Endurance Specialty Holdings, 7.50% Pfd., Series B			1,078,813				*	*(2)
$	988,000			Everest Re Holdings, 6.60% 05/15/37			996,645				(1	)
				GWL&A Financial:
$	1,526,000			Great West Life & Annuity Insurance, 7.153% 05/16/46, 144A****			1,579,410				(1	)
				Liberty Mutual Group:
$	17,950,000			Liberty Mutual Group, 7.80% 03/15/37, 144A****			19,565,500				(1	)
$	5,520,000			Liberty Mutual Group, 10.75% 06/15/58, 144A****			8,390,400				(1	)
$	13,000,000			Lincoln National Corporation, 7.00% 05/17/66			13,325,000				(1	)
				MetLife:
$	3,759,000			MetLife, Inc., 10.75% 08/01/39			5,676,090				(1	)
$	17,200,000			MetLife Capital Trust X, 9.25% 04/08/38, 144A****			22,489,000				(1	)
				PartnerRe:
	20,486			PartnerRe Ltd, 5.875%, Pfd. Series F			443,522				*	*(2)
	37,556			PartnerRe Ltd., 6.50% Pfd., Series D			913,831				*	*(2)
	71,237			PartnerRe Ltd., 7.250% Pfd., Series E			1,838,627				*	*(2)
	720,000			Principal Financial Group, 6.518% Pfd., Series B			18,052,200				*
				Prudential Financial:
$	6,930,000			Prudential Financial, Inc., 5.625% 06/15/43			7,189,875				(1	)
$	6,375,000			Prudential Financial, Inc., 5.875% 09/15/42			6,661,875				(1	)
$	9,070,000			Prudential Financial, Inc., 8.875% 06/15/38			11,110,750				(1	)
				QBE Insurance:
$	8,000,000			QBE Capital Funding III Ltd., 7.25% 05/24/41, 144A****			8,351,688				(1	)(2)
$	350,000			StanCorp Financial Group, 6.90% 06/01/67			353,500
	288,323			W.R. Berkley Corporation, 5.625% Pfd.			6,107,402

 

6

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Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2014 (Unaudited)

 

	Shares/$ Par						Value
	Preferred Securities — (Continued)
				Insurance — (Continued)
				XL Group PLC:
$	17,080,000			XL Capital Ltd., 6.50%, Series E		$	16,930,550				(1	)(2)
							211,685,532
				Utilities — 4.9%
				Commonwealth Edison:
$	2,000,000			COMED Financing III, 6.35% 03/15/33		$	1,970,000
	10,400			Entergy Louisiana, Inc., 6.95% Pfd.			1,041,950				*
	116,000			Integrys Energy Group, Inc., 6.00% Pfd.			2,895,534
				PPL Corp:
$	19,500,000			PPL Capital Funding, Inc., 6.70% 03/30/67, Series A			19,562,127				(1	)
$	5,500,000			Puget Sound Energy, Inc., 6.974% 06/01/67			5,606,370
$	2,000,000			Southern California Edison Co., 6.25%, Series E			2,129,352				*
							33,205,333
				Energy — 2.7%
$	9,780,000			DCP Midstream LLC, 5.85% 05/21/2043, 144A****			9,217,650				(1	)
$	4,000,000			Enbridge Energy Partners LP, 8.05% 10/01/37			4,508,388				(1	)
$	3,675,000			Enterprise Products Partners, 7.034% 01/15/68, Series B			4,110,318				(1	)
							17,836,356
				Real Estate Investment Trust (REIT) — 6.3%
	425,148			Alexandria Real Estate, 6.45% Pfd. Series E			10,152,534
				Duke Realty Corp.:
	100,000			Duke Realty Corp, 6.50% Pfd., Series K			2,412,500
	234,877			Duke Realty Corp, 6.60% Pfd., Series L			5,705,515
				Kimco Realty:
	18,500			Kimco Realty Corporation, 5.50% Pfd, Series J			389,610
	5,000			Kimco Realty Corporation, 5.625% Pfd. Series K			107,063
	47,308			Kimco Realty Corporation, 6.00% Pfd. Series I			1,083,651
	116,006			Kimco Realty Corporation, 6.90% Pfd, Series H			2,988,315				(1	)
				National Retail Properties:
	45,300			National Retail Properties, Inc., 5.70% Pfd, Series E			940,541
	27,879			National Retail Properties, Inc., 6.625% Pfd, Series D			665,541

 

7

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Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2014 (Unaudited)

 

	Shares/$ Par						Value
	Preferred Securities — (Continued)
				Real Estate Investment Trust (REIT) — (Continued)
				PS Business Parks:
	23,808			PS Business Parks, Inc., 5.70% Pfd., Series V		$	506,456
	20,867			PS Business Parks, Inc., 5.75%, Pfd., Series U			444,676
	487,476			PS Business Parks, Inc., 6.00% Pfd., Series T			10,938,961
	97,606			PS Business Parks, Inc., 6.45% Pfd., Series S			2,316,434				(1	)
	12,180			PS Business Parks, Inc., 6.875% Pfd., Series R			308,276				(1	)
	112,614			Public Storage, 6.35% Pfd, Series R			2,842,659
	7,035			Regency Centers Corp, 6.625% Pfd., Series 6			169,624
	8,313			Weingarten Realty Investors, 6.50% Pfd., Series F			201,611				(1	)
							42,173,967
				Miscellaneous Industries — 0.6%
$	4,430,000			Textron Financial Corporation, 6.00% 02/15/67, 144A****			3,998,075	(1)
							3,998,075
				Total Preferred Securities (Cost $656,554,591)			653,797,080
	Corporate Debt Securities — 1.0%
				Banking — 0.9%
$	700,000			Regions Financial Corporation, 7.375% 12/10/37, Sub Notes			801,332
	112,876			Texas Capital Bancshares Inc., 6.50% 09/21/42, Sub Notes			2,659,641				(1	)
	100,000			Zions Bancorporation, 6.95%, 09/15/28, Sub Notes			2,681,250
							6,142,223
				Financial Services — 0.1%
	39,267			Affiliated Managers Group, Inc., 6.375% 08/15/42			960,530	(1)
							960,530
				Total Corporate Debt Securities (Cost $6,982,150)			7,102,753

 

8

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Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS (Continued)

February 28, 2014 (Unaudited)

 

Shares/$ Par						Value
	Money Market Fund — 0.3%
				BlackRock Liquidity Funds:
	1,963,829			T-Fund		$	1,963,829
				Total Money Market Fund (Cost $1,963,829)			1,963,829

Total Investments (Cost $665,500,570***)			98.8%				662,863,662
Other Assets And Liabilities (Net)			1.2%				7,739,267
Total Managed Assets			100.0%	‡		$	670,602,929
Loan Principal Balance							(221,000,000	)
Total Net Assets Available To Common Stock						$	449,602,929

 

*	Securities eligible for the Dividends Received Deduction and distributing Qualified Dividend Income.

**	Securities distributing Qualified Dividend Income only.

***	Aggregate cost of securities held.

****	Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional buyers. At February 28, 2014, these securities amounted to $177,206,055 or 26.4% of total managed assets.

(1)	All or a portion of this security is pledged as collateral for the Fund’s loan. The total value of such securities was $393,273,314 at February 28, 2014.

(2)	Foreign Issuer.

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

 

		ABBREVIATIONS:
Pfd.		—		Preferred Securities
REIT		—		Real Estate Investment Trust

 

9

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Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

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

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

 

		Value
OPERATIONS:
Net investment income		$	8,251,953
Net realized gain/(loss) on investments sold during the period			(292,825	)
Change in net unrealized appreciation/depreciation of investments			16,086,192
Net increase in net assets resulting from operations			24,045,320
DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock Shareholders(2)			(10,191,408	)
Total Distributions to Common Stock Shareholders			(10,191,408	)
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK
FOR THE PERIOD		$	13,853,912
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period		$	435,749,017
Net increase in net assets during the period			13,853,912
End of period		$	449,602,929

 

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

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

 

10

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Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

FINANCIAL HIGHLIGHTS⁽¹⁾

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

For a Common Stock share outstanding throughout the period

 

PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period		$	22.75
INVESTMENT OPERATIONS:
Net investment income			0.43
Net realized and unrealized gain/(loss) on investments			0.82
Total from investment operations			1.25
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
From net investment income			(0.53	)
Total distributions to Common Stock Shareholders			(0.53	)
Net asset value, end of period		$	23.47
Market value, end of period		$	21.91
Common Stock shares outstanding, end of period			19,156,782
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
Net investment income†			7.64	%*
Operating expenses including interest expense			1.70	%*
Operating expenses excluding interest expense			1.12	%*

SUPPLEMENTAL DATA:††
Portfolio turnover rate			6	%**
Total managed assets, end of period (in 000’s)		$	670,603
Ratio of operating expenses including interest expense to total managed assets			1.13	%*
Ratio of operating expenses excluding interest expense to total managed assets			0.74	%*

 

 

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

*	Annualized.

**	Not Annualized.

†	The net investment income ratios reflect income net of operating expenses, including interest expense.

††	Information presented under heading Supplemental Data includes loan principal balance.

 

11

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Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

FINANCIAL HIGHLIGHTS (Continued)

Per Share of Common Stock (Unaudited)

 

		Total Dividends Paid				Net Asset Value				NYSE Closing Price				Dividend Reinvestment Price(1)
December 31, 2013		$	0.2120			$	22.46			$	20.53			$	20.49
January 31, 2014			0.1600				22.95				20.90				20.86
February 28, 2014			0.1600				23.47				21.91				21.92

 

(1)

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

 

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Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited)

 

1.	Aggregate Information for Federal Income Tax Purposes

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

 

2.	Additional Accounting Standards

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

 

•       Level 1		–		quoted prices in active markets for identical securities
•       Level 2		–		other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)
•       Level 3		–		significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Transfers in and out of levels are recognized at market value at the end of the period. A summary of the inputs used to value the Fund’s investments as of February 28, 2014 is as follows:

 

		Total Value at February 28, 2014				Level 1 Quoted Price				Level 2 Significant Observable Inputs				Level 3 Significant Unobservable Inputs
Preferred Securities
Banking		$	333,432,832			$	241,424,420			$	92,008,412			$	—
Financial Services			11,464,985				11,464,985				—				—
Insurance			211,685,532				128,709,114				82,976,418				—
Utilities			33,205,333				22,457,661				10,747,672				—
Energy			17,836,356				4,508,388				13,327,968				—
Real Estate Investment (REIT)			42,173,967				42,173,967				—				—
Miscellaneous Industries			3,998,075				—				3,998,075				—
Corporate Debt Securities			7,102,753				6,301,421				801,332				—
Money Market Fund			1,963,829				1,963,829				—				—
Total Investments		$	662,863,662			$	459,003,785			$	203,859,877			$	—

 

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Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

 

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

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

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

 

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