FLAHERTY & CRUMRINE PREFERRED INCOME FUND
Dear Shareholder:
The Flaherty & Crumrine Preferred Income Fund ("PFD") delivered very
respectable results during the most recently concluded fiscal quarter. For the
three month period ending February 28, 2005, the Fund produced a total return on
net asset value ("NAV") of 5.8%(1). All segments of the investment portfolio
performed well during the period; however, the Adjustable Rate Preferred
securities in the Fund (approximately 8% of the portfolio at the beginning of
the quarter) were exceptionally strong. The Fund's hedges were a modest drag on
investment results, as long-term interest rates declined during the period.
In recent letters, we have indicated that the Fund is susceptible to the
same factors that have forced many other income-oriented funds to reduce their
dividend distributions. In April, the Fund's monthly dividend was set at $0.0905
per share, a 4.7% reduction from the prior month.
As is the case with other leveraged funds, rising short-term interest rates
have increased the amount the Fund must pay on its Money Market Cumulative
PreferredTM Stock ("MMP(R)"). Typically, rising short-term interest rates are
accompanied by rising long-term rates, which should increase the value of the
Fund's hedges. The gains on the hedges can then be invested in additional
securities, which in turn increase the Fund's income, and, on balance, help keep
the Fund's dividend relatively stable.
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Maturity 4/30/04 2/28/05
0.25 0.97 2.74
0.50 1.14 2.97
2.00 2.31 3.58
3.00 2.75 3.75
5.00 3.61 3.99
10.00 4.50 4.36
30.00 5.28 4.71
As the above chart shows, current market conditions are anything but
typical--since the Federal Reserve signaled its intent to raise short-term
interest rates last April, short-term interest rates have increased by
approximately 175 basis points, while long-term interest rates have FALLEN by
over 50 basis points! As a result, the Fund's MMP(R) expense is significantly
higher, but the hedges have not enabled us to produce more income. While we do
not expect these conditions to persist for long periods, at this time it is
necessary to adjust the monthly distribution to a more sustainable amount.
Over the longer term, a "flatter" yield curve (as measured by the
difference in short- and long-term interest rates) is not a bad thing for the
Fund. Obviously, the cost of the Fund's leverage will go up, but at the same
time, the cost of the Fund's hedging strategy should go down. This effect can be
significant
--------------------------
(1) Based on monthly data provided by Lipper Inc. Distributions are assumed
to be reinvested at NAV in accordance with Lipper's practice.
since the leverage comprises roughly 33% of the Fund's assets, while the ENTIRE
portfolio is hedged. The impact of the higher leverage cost occurs almost
immediately, while the benefits of lower hedging costs take a bit longer to
impact the Fund's income. The mathematics of all this can be a bit daunting, but
over the long run, these two effects have tended to offset each other.
As a rule, we don't comment on the market price of the Fund's common
shares; however, recent market activity certainly does warrant some
observations. Over the long run, the market price SHOULD track the net asset
value. From time to time we expect to see some deviation due to factors or
circumstances unique to the Fund. For example, most investors cannot replicate
PFD's investment portfolio, hedging strategy, or leverage, and therefore may be
willing to pay a premium to the NAV.
The chart below plots the recent market price and net asset value
of PFD. For most of this period, the market price traded at
a premium to the NAV. We attributed this in part to the Fund's long history and
successful track record, plus an attractive dividend rate which may be taxed at
favorable rates for certain investors. During late February of this year, shares
were trading around $183/4; as of this writing, they are trading around $16.00.
During the same period, the net asset value declined less than $0.15!
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Flaherty & Crumrine Preferred Income Fund
Market Price vs. Net Asset Value
MARKET PRICE NAV
2/6/04 18.45 16.27
2/13/04 18.55 16.32
2/20/04 18.88 16.23
2/27/04 18.97 16.37
3/5/04 19.28 16.41
3/12/04 19.3 16.51
3/19/04 19.58 16.51
3/26/04 19.7 16.3
4/2/04 19.12 16.19
4/9/04 17.2 16.17
4/16/04 16.83 16.1
4/23/04 16.12 15.93
4/30/04 16.11 15.94
5/7/04 15.52 15.69
5/14/04 15.83 15.51
5/21/04 16.45 15.4
5/28/04 17.62 15.45
6/4/04 17.25 15.43
6/11/04 17.5 15.36
6/18/04 17.65 15.42
6/25/04 17.54 15.28
7/2/04 17.45 15.32
7/9/04 17.23 15.29
7/16/04 17.19 15.42
7/23/04 17.03 15.24
7/30/04 16.78 15.28
8/6/04 17.07 15.43
8/13/04 17.35 15.49
8/20/04 17.93 15.41
8/27/04 17.93 15.44
9/3/04 18.03 15.4
9/10/04 18.24 15.56
9/17/04 18.33 15.73
9/24/04 18 15.86
10/1/04 17.85 15.67
10/8/04 18.39 15.73
10/15/04 18.47 15.83
10/22/04 18.48 15.77
10/29/04 18.3 15.74
11/5/04 18.08 15.65
11/12/04 18.18 15.65
11/19/04 18.32 15.65
11/26/04 18.27 15.67
12/3/04 17.26 15.72
12/10/04 17.35 15.89
12/17/04 17.77 15.91
12/24/04 18.1 15.74
12/31/04 18.25 15.89
1/7/05 18.27 15.83
1/14/05 18.13 16.05
1/21/05 18.33 16.1
1/28/05 18.43 16.08
2/4/05 18.39 16.27
2/11/05 18.67 16.27
2/18/05 18.77 16.06
2/25/05 18.64 16.1
3/4/05 18.25 16.15
3/11/05 17.7 15.98
3/18/05 16.08 15.97
3/25/05 15.6 15.78
4/4/05 16.03 15.99
Unlike open-end mutual funds, investors in closed-end funds should
have a longer investment horizon in order to weather swings in the relationship
between market price and NAV. In that same vein, investors with a long-term
investment horizon should stay focused on the NAV performance and dividend
history of the Fund. We plan to stay the course and hopefully will continue to
meet and exceed the objectives of the Fund.
As was evident in its recent Proxy Statement, 2005 represents a year
of transition in the individuals representing the Fund's shareholders. Martin
Brody, who has served as a Director since the inception of the Fund, will not
stand for reelection at the upcoming Shareholder's Meeting. Martin brought a
wealth of wisdom and experience to the board, and will be missed. Karen Hogan
has been nominated by the Board to replace Martin. Karen brings an extensive
financial and investment banking background to the Board; her knowledge will
certainly benefit Shareholders. In addition, to comply with recent SEC rule
amendments requiring that independent directors constitute 75% of the Board,
Robert Ettinger has resigned as a Director. However, Bob will continue to be
very involved with the management of the Fund, continuing to serve as President
of both the Fund and Flaherty & Crumrine Incorporated, the Fund's Investment
Adviser.
Please take advantage of the Fund's website, WWW.PREFERREDINCOME.COM.
It contains a wide range of useful and up-to-date information about the Fund. We
have also addressed in greater detail many of the topics discussed in this
letter.
Sincerely,
/S/ DONALD F. CRUMRINE /S/ ROBERT M. ETTINGER
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
April 5, 2005
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OVERVIEW
FEBRUARY 28, 2005 (UNAUDITED)
-----------------------------------------------------
FUND STATISTICS ON 2/28/05
---------------------------------------------
Net Asset Value $ 16.03
Market Price $ 18.77
Premium 17.09%
Yield on Market Price 6.07%
Common Shares
Outstanding 10,300,010
MOODY'S RATINGS % OF PORTFOLIO
---------------------------------------------
Aaa 0.5%
Aa 9.7%
A 23.6%
Baa 39.7%
Ba 14.5%
Not Rated 6.3%
---------------------------------------------
Below Investment Grade* 13.8%
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND S&P.
INDUSTRY CATEGORIES % OF PORTFOLIO
------------------------------------------------------
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Utilities 42%
Banks 25%
Financial Services 15%
Insurance 9%
Oil and Gas 4%
Other 4%
REITs 1%
TOP 10 HOLDINGS BY ISSUER % OF PORTFOLIO
-------------------------------------------------
Interstate Power 5.3%
Lehman Brothers 4.8%
Citigroup 4.6%
Alabama Power 4.2%
Fannie Mae 3.8%
North Fork Bancorporation 3.6%
ABN Amro 3.4%
Zurich RegCaPS 3.3%
Xcel Energy 3.0%
SLM Corporation 2.9%
% OF PORTFOLIO**
---------------------------------------------------------------------------------------------------------------------
Holdings Generating Qualified Dividend Income (QDI) for Individuals 77%
Holdings Generating Income Eligible for the Corporate Dividend Received Deduction (DRD) 76%
---------------------------------------------------------------------------------------------------------------------
** 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.
4
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 2005 (UNAUDITED)
-----------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- 92.6%
BANKING -- 25.0%
------------------------------------------------------------------------------------------------------------------------------------
ABN AMRO North America, Inc.:
3,625 6.46% Pfd., 144A**** ........................................................... $ 3,745,948*
4,500 6.59% Pfd., 144A**** ........................................................... 4,687,560*
400 BancWest Capital I, 9.50% Pfd. 12/01/30 .......................................... 10,420(1)
$ 750,000 Barnett Capital II, 7.95% 12/01/26 Capital Security .............................. 822,214
$ 1,500,000 BT Preferred Capital Trust II, 7.875% 02/25/27 Capital Security .................. 1,639,042(1)
$ 250,000 Chase Capital I, 7.67% 12/01/26 Capital Security ................................. 271,486
Citigroup, Inc.:
113,427 5.864% Pfd., Series M .......................................................... 5,844,893*
9,876 6.213% Pfd., Series G .......................................................... 516,070*
26,200 6.231% Pfd., Series H .......................................................... 1,379,692*
65,350 6.365% Pfd., Series F .......................................................... 3,469,431*
Cobank, ACB:
50,000 7.00% Pfd., 144A**** ........................................................... 2,778,750*
75,000 Adj. Rate Pfd., 144A**** ....................................................... 4,227,750*
$ 500,000 Comerica (Imperial) Capital Trust I, 9.98% 12/31/26 Capital Security, Series B ... 584,522
$ 2,250,000 First Hawaiian Capital I, 8.343% 07/01/27 Capital Security, Series B ............. 2,498,344(1)
$ 1,500,000 First Union Capital II, 7.95% 11/15/29 Capital Security .......................... 1,890,188
$ 906,000 First Union Institutional Capital I, 8.04% 12/01/26 Capital Security ............. 994,172
$ 1,820,000 First Union Institutional Capital II, 7.85% 01/01/27 Capital Security ............ 1,985,101
$ 7,820,000 GreenPoint Capital Trust I, 9.10% 06/01/27 Capital Security ...................... 8,839,220
$ 2,500,000 HBOS Capital Funding LP, 6.85% Pfd. .............................................. 2,638,613(1)
34,200 HSBC USA, Inc., $2.8575 Pfd. ..................................................... 1,749,501*
37,500 J.P. Morgan Chase & Co., 6.625% Pfd., Series H ................................... 1,933,875*
$ 270,000 Keycorp Institutional Capital B, 8.25% 12/15/26 Capital Security ................. 297,100
$ 674,000 NB Capital Trust II, 7.83% 12/15/26 Capital Security ............................. 737,990
$ 1,700,000 RBS Capital Trust B, 6.80% Pfd. .................................................. 1,784,176**(1)
16,500 Regions Financial Trust I, 8.00% Pfd. ............................................ 432,713
$ 2,635,000 Republic New York Capital II, 7.53% 12/04/26 Capital Security .................... 2,848,369(1)
10 Roslyn Real Estate, 8.95% Pfd., Pvt., Series C, 144A**** ......................... 1,079,875
$ 1,200,000 Wachovia Capital Trust V, 7.965% 06/01/27 Capital Security, 144A**** ............. 1,325,124
7,500 Wachovia Preferred Funding, 7.25% Pfd., Series A ................................. 217,350
-------------------------------------------------------------------------------------------------------------------
61,229,489
----------------
FINANCIAL SERVICES -- 14.5%
------------------------------------------------------------------------------------------------------------------------------------
The Bear Stearns Companies, Inc.:
63,100 5.49% Pfd., Series G ........................................................... 3,171,090*
49,040 5.72% Pfd., Series F ........................................................... 2,558,662*
5
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2005 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
FINANCIAL SERVICES -- (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
Fannie Mae:
60,000 4.75% Pfd., Series M ........................................................... $ 2,516,400*
120,000 Adj. Rate Pfd. ................................................................. 6,756,000*
Freddie Mac:
6,975 5.00% Pfd., Series F ........................................................... 308,121*
28,350 5.30% Pfd ...................................................................... 1,327,489*
Lehman Brothers Holdings, Inc.:
68,280 5.67% Pfd., Series D ........................................................... 3,493,205*
154,475 5.94% Pfd., Series C ........................................................... 7,926,112*
15,000 6.50% Pfd., Series F ........................................................... 401,325*
123,805 SLM Corporation, 6.97% Pfd., Series A ............................................ 7,025,934*
-------------------------------------------------------------------------------------------------------------------
35,484,338
----------------
INSURANCE -- 8.4%
------------------------------------------------------------------------------------------------------------------------------------
$ 2,000,000 AON Capital Trust A, 8.205% 01/01/27 Capital Security ............................ 2,290,780
21,000 Everest Re Capital Trust II, 6.20% Pfd. Series B ................................. 515,550(1)
$ 5,150,000 MMI Capital Trust I, 7.625% 12/15/27 Capital Security, Series B .................. 5,814,144
18 Premium Assets, Series A, Zurich RegCaPS Variable Inverse Pfd., Pvt. ............. 2,049,026*
$ 4,000,000 Provident Financing Trust I, 7.405% 03/15/38 Capital Security .................... 3,858,100
7,000 St. Paul Capital Trust I, 7.60% Pfd. ............................................. 184,030
Zurich RegCaPS Funding Trust:
2,850 6.01% Pfd., 144A**** ........................................................... 2,889,629*
2,950 6.58% Pfd., 144A**** ........................................................... 3,116,277*
-------------------------------------------------------------------------------------------------------------------
20,717,536
----------------
UTILITIES -- 37.7%
------------------------------------------------------------------------------------------------------------------------------------
Alabama Power Company:
300 4.52% Pfd. ..................................................................... 27,918*
5,734 4.72% Pfd. ..................................................................... 557,201*
111,600 5.20% Pfd. ..................................................................... 2,797,812*
275,000 5.30% Pfd. ..................................................................... 7,026,250*
10,000 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 ........................ 1,044,050*
Central Hudson Gas & Electric Corporation:
5,000 4.35% Pfd., Series D, Pvt. ..................................................... 424,625*
900 4.96% Pfd., Series E, Pvt. ..................................................... 83,947*
10,000 Central Illinois Light Company, 4.64% Pfd. ....................................... 938,050*
11,000 Central Illinois Public Service Corporation, 4.90% Pfd. .......................... 1,057,705*
16,679 Central Vermont Public Service Corporation, 8.30% Sinking Fund Pfd., Pvt. ........ 1,734,533*
6
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2005 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
Connecticut Light & Power Company:
2,024 4.50% Pfd., Pvt. ............................................................... $ 83,419*
9,300 5.28% Pfd. ..................................................................... 453,840*
1,905 6.56% Pfd., Series 1968 ........................................................ 98,603*
15,778 $3.24 Pfd. ..................................................................... 828,108*
2,100 Consolidated Edison Company of New York, 4.65% Pfd., Series C .................... 196,381*
2,886 Dayton Power and Light Company, 3.90% Pfd., Series C ............................. 212,511*
Duke Energy Corporation:
4,556 4.50% Pfd., Series C, Pvt. ..................................................... 400,655*
519 7.04% Pfd., Series Y ........................................................... 53,569*
30,762 7.85% Pfd., Series S ........................................................... 3,188,635*
Duquesne Light Company:
7,675 4.10% Pfd. ..................................................................... 284,167*
6,330 4.15% Pfd. ..................................................................... 237,217*
910 4.20% Pfd. ..................................................................... 34,512*
25,775 6.50% Pfd. ..................................................................... 1,407,444*
5,490 $2.10 Pfd., Series A ........................................................... 208,208*
5,000 Energy East Capital Trust I, 8.25% Pfd. 131,975
Entergy Arkansas, Inc.:
5,574 7.32% Pfd. ..................................................................... 581,898*
11,350 7.40% Pfd. ..................................................................... 1,180,911*
5,030 7.80% Pfd. ..................................................................... 526,113*
3,822 7.88% Pfd. ..................................................................... 398,883*
30,266 $1.96 Pfd. ..................................................................... 757,407*
4,555 Entergy Gulf States, Inc., 7.56% Pfd. ............................................ 463,790*
Entergy Louisiana, Inc.:
260 7.84% Pfd. ..................................................................... 27,187*
106,138 8.00% Pfd., Series 92 .......................................................... 2,677,331*
Entergy Mississippi, Inc.:
5,000 4.92% Pfd. ..................................................................... 427,250*
8,600 7.44% Pfd. ..................................................................... 891,218*
10,800 Enterprise Capital Trust I, 7.44% Pfd., Series A ................................. 274,590
Florida Power Company:
17,769 4.58% Pfd. ..................................................................... 1,608,805*
5,157 4.60% Pfd. ..................................................................... 466,605*
18,535 4.75% Pfd. ..................................................................... 1,731,725*
50,000 Georgia Power Capital Trust V, 7.125% Pfd. ...................................... 1,331,250
2,010 Great Plains Energy, Inc., 4.50% Pfd. ............................................ 163,433*
$ 3,500,000 Houston Light & Power, Capital Trust II, 8.257%, 02/01/37 Capital Security ....... 3,840,217
7
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2005 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
32,650 Indianapolis Power & Light Company, 5.65% Pfd. ................................... $ 3,108,770*
384,000 Interstate Power & Light Company, 8.375% Pfd., Series B .......................... 12,963,840*
14,250 Narragansett Electric Company, 4.64% Pfd. ........................................ 658,136*
Northern Indiana Public Service Company:
3,905 7.44% Pfd. ..................................................................... 399,228*
7,465 Adj. Rate Pfd., Series A ....................................................... 379,222*
6,170 Ohio Edison Company, 4.44% Pfd. .................................................. 498,783*
Pacific Enterprises:
27,430 $4.50 Pfd. ..................................................................... 2,464,860*
10,000 $4.75 Pfd., Series 53 .......................................................... 948,500*
PacifiCorp:
451 5.40% Pfd. ..................................................................... 47,964*
1,225 $4.56 Pfd. ..................................................................... 110,011*
14,542 $4.72 Pfd. ..................................................................... 1,351,752*
14,388 $7.48 Sinking Fund Pfd. ........................................................ 1,540,379*
5,000 PECO Energy Company, $4.40 Pfd., Series C ........................................ 406,850*
790 Pennsylvania Power Company, 7.75% Pfd. ........................................... 80,197*
11,194 Portland General Electric, 7.75% Sinking Fund Pfd. ............................... 1,134,232*
5,000 PPL Electric Utilities Corporation, 6.75% Pfd. ................................... 522,775*
10,000 Public Service Company of New Mexico, 4.58% Pfd., Series 1965 .................... 789,600*
San Diego Gas & Electric Company:
1,200 4.40% Pfd. ..................................................................... 21,192*
700 4.50% Pfd. ..................................................................... 12,645*
67,000 $1.70 Pfd. ..................................................................... 1,746,020*
18,750 $1.7625 Sinking Fund Pfd. ...................................................... 483,844*
125,000 Savannah Electric & Power Company, 6.00% Pfd. .................................... 3,248,750*
South Carolina Electric & Gas Company:
25,373 5.125% Purchase Fund Pfd., Pvt. ................................................ 1,305,695*
6,703 6.00% Purchase Fund Pfd., Pvt. ................................................. 341,652*
54,100 Southern California Edison, 4.08% Pfd. ........................................... 1,054,138*
75,000 Southern Union Company, 7.55% Pfd. ............................................... 2,072,625*
$ 750,000 TXU Electric Capital V, 8.175% 01/30/37 Capital Security ......................... 825,244
TXU US Holdings Company:
10,000 $4.00 Pfd., Series TES ......................................................... 745,750*
5,700 $4.00 Pfd., Series TPL ......................................................... 425,077*
1,000 $4.84 Pfd. ..................................................................... 90,230*
Union Electric Company:
14,150 4.56% Pfd. ..................................................................... 1,309,158*
4,000 $7.64 Pfd. ..................................................................... 417,580*
8
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2005 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
12,500 Virginia Electric & Power Company, $7.05 Pfd. .................................... $ 1,289,500*
Wisconsin Power & Light Company:
1,220 4.50% Pfd. ..................................................................... 111,978*
394 4.80% Pfd. ..................................................................... 38,184*
13,000 6.20% Pfd. ..................................................................... 1,334,255*
Xcel Energy, Inc.:
16,030 $4.08 Pfd., Series B ........................................................... 1,237,516*
26,200 $4.10 Pfd., Series C ........................................................... 2,032,596*
22,000 $4.11 Pfd., Series D ........................................................... 1,710,830*
17,750 $4.16 Pfd., Series E ........................................................... 1,397,191*
10,000 $4.56 Pfd., Series G ........................................................... 862,850*
-------------------------------------------------------------------------------------------------------------------
92,379,547
----------------
OIL AND GAS -- 4.4%
------------------------------------------------------------------------------------------------------------------------------------
17,200 Anadarko Petroleum Corporation, 5.46% Pfd. ....................................... 1,764,720*
7,000 Apache Corporation, 5.68% Pfd., Series B ......................................... 730,450*
8,000 Devon Energy Corporation, 6.49% Pfd., Series A ................................... 847,360*
5,985 EOG Resources, Inc., 7.195% Pfd., Series B ....................................... 6,386,953*
10,000 Lasmo America Limited, 8.15% Pfd., 144A**** ...................................... 1,104,650*
-------------------------------------------------------------------------------------------------------------------
10,834,133
----------------
REAL ESTATE INVESTMENT TRUST (REIT) -- 0.9%
------------------------------------------------------------------------------------------------------------------------------------
40,000 Realty Income Corporation, 7.375%, Pfd., REIT, Series D .......................... 1,067,800
40,000 Regency Centers Corporation, 7.25% Pfd., REIT .................................... 1,041,400
-------------------------------------------------------------------------------------------------------------------
2,109,200
----------------
MISCELLANEOUS INDUSTRIES -- 1.7%
------------------------------------------------------------------------------------------------------------------------------------
13,600 E.I. Du Pont de Nemours and Company, $4.50 Pfd., Series B ........................ 1,269,220*
36,200 Farmland Industries, Inc., 8.00% Pfd., 144A**** .................................. 18,100*+
33,250 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** .............................. 2,796,491*
26,000 Touch America Holdings, $6.875 Pfd. .............................................. --*+
-------------------------------------------------------------------------------------------------------------------
4,083,811
----------------
TOTAL PREFERRED SECURITIES
(Cost $204,979,528) ............................................................ 226,838,054
----------------
9
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2005 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
CORPORATE DEBT SECURITY -- 0.5%
UTILITIES -- 0.5%
------------------------------------------------------------------------------------------------------------------------------------
45,000 Northern States Power Company, 8.00% ............................................. $ 1,231,650
-------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE DEBT SECURITY
(Cost $1,107,375) .............................................................. 1,231,650
----------------
COMMON STOCKS AND CONVERTIBLE SECURITIES -- 5.1%
BANKING -- 0.4%
------------------------------------------------------------------------------------------------------------------------------------
50,000 New York Community Bancorp, Inc. ................................................. 913,750*
-------------------------------------------------------------------------------------------------------------------
913,750
----------------
INSURANCE -- 0.7%
------------------------------------------------------------------------------------------------------------------------------------
50,000 UnumProvident Corporation, 8.25% Mandatory Convertible, 05/16/06 ................. 1,715,750
-------------------------------------------------------------------------------------------------------------------
1,715,750
----------------
UTILITIES -- 4.0%
------------------------------------------------------------------------------------------------------------------------------------
107,500 Duke Energy Corporation .......................................................... 2,905,188*
88,278 FPL Group, Inc. .................................................................. 7,015,894*
-------------------------------------------------------------------------------------------------------------------
9,921,082
----------------
TOTAL COMMON STOCKS AND CONVERTIBLE SECURITIES
(Cost $11,227,229) ............................................................. 12,550,582
----------------
OPTION CONTRACTS -- 0.9%
1,425 June Put Options on June U.S. Treasury Bond Futures, Expiring 05/20/05 ........... 2,317,578+
-------------------------------------------------------------------------------------------------------------------
TOTAL OPTION CONTRACTS
(Cost $1,693,679) .............................................................. 2,317,578
----------------
10
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2005 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
MONEY MARKET FUND -- 0.5%
1,159,750 BlackRock Provident Institutional, TempFund ...................................... $ 1,159,750
-------------------------------------------------------------------------------------------------------------------
TOTAL MONEY MARKET FUND
(Cost $1,159,750) .............................................................. 1,159,750
----------------
TOTAL INVESTMENTS (Cost $220,167,561***) ......................................... 99.6% 244,097,614
OTHER ASSETS AND LIABILITIES (NET) ............................................... 0.4% 983,537
--------- ----------------
TOTAL NET ASSETS AVAILABLE TO COMMON AND PREFERRED STOCK ......................... 100.0%++ $ 245,081,151
--------- ----------------
MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (MMP(R)) REDEMPTION VALUE .......................... (80,000,000)
----------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ..................................................... $ 165,081,151
================
-----------------------------
* 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.
(1) Foreign Issuer.
+ Non-income producing.
++ The percentage shown for each investment category is the total value
of that category as a percentage of net assets available to Common and
Preferred Stock.
ABBREVIATIONS:
REIT -- Real Estate Investment Trust
PFD. -- Preferred Securities
PVT. -- Private Placement Securities
Capital Securities are treated as debt instruments for financial
statement purposes and the amounts shown in the Shares/$ Par column
are dollar amounts of par value.
11
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)
FOR THE PERIOD FROM DECEMBER 1, 2004 THROUGH FEBRUARY 28, 2005 (UNAUDITED)
--------------------------------------------------------------------------------
VALUE
-------
OPERATIONS:
Net investment income ...................................................................... $ 3,192,856
Net realized gain on investments sold during the period .................................... 2,324,693
Change in net unrealized appreciation of investments held during the period ................ 3,974,833
Distributions to Money Market Cumulative PreferredTM Stock
Shareholders from net investment income, including changes in accumulated
undeclared distributions ............................................................... (437,500)
----------------
NET INCREASE IN NET ASSETS FROM OPERATIONS ............................................. 9,054,882
DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock Shareholders(2) .................. (3,600,705)
----------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS ....................................... (3,600,705)
FUND SHARE TRANSACTIONS:
Increase from Common Stock Transactions .................................................... 525,972
----------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING
FROM FUND SHARE TRANSACTIONS ........................................................... 525,972
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK ----------------
FOR THE PERIOD ......................................................................... $ 5,980,149
================
------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period ........................................................................ $ 159,101,002
Net increase during the period ............................................................. 5,980,149
----------------
End of period .............................................................................. $ 165,081,151
================
--------------------------------------------------------
(1) These tables summarize the three months ended February 28, 2005 and should
be read in conjunction with the Fund's audited financial statements,
including footnotes, in its Annual Report dated November 30, 2004.
(2) Includes income earned, but not paid out, in prior fiscal year.
12
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS(1)
FOR THE PERIOD FROM DECEMBER 1, 2004 THROUGH FEBRUARY 28, 2005(UNAUDITED)
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD.
------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ....................................................... $ 15.49
----------------
INVESTMENT OPERATIONS:
Net investment income ...................................................................... 0.31
Net realized and unrealized gain on investments ............................................ 0.62
DISTRIBUTIONS TO MMP(R)* SHAREHOLDERS:
From net investment income ................................................................. (0.04)
From net realized capital gains ............................................................ --
---------------
Total from investment operations ........................................................... 0.89
---------------
DISTRIBUTIONS TO COMMON SHAREHOLDERS:
From net investment income ................................................................. (0.35)
From net realized capital gains ............................................................ --
---------------
Total distributions to Common Shareholders ................................................. (0.35)
---------------
Net asset value, end of period ............................................................. $ 16.03
===============
Market value, end of period ................................................................ $ 18.77
===============
Common shares outstanding, end of period ................................................... 10,300,010
===============
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
Net investment income + .................................................................... 6.70%**
Operating expenses ......................................................................... 1.52%**
--------------------------------------------------------
SUPPLEMENTAL DATA:++
Portfolio turnover rate .................................................................... 10%***
Total net assets available to Common and Preferred Stock, end of period (in 000's) ......... $ 245,081
Ratio of operating expenses to total average net assets available to
Common and Preferred Stock ............................................................. 1.03%**
(1) These tables summarize the three months ended February 28, 2005 and
should be read in conjunction with the Fund's audited financial statements,
including footnotes, in its Annual Report dated November 30, 2004.
* Money Market Cumulative PreferredTM Stock.
** Annualized.
*** Not Annualized.
+ The net investment income ratios reflect income net of operating expenses
and payments to MMP(R)* Shareholders.
++ Information presented under heading Supplemental Data includes MMP(R)*.
--------------------------------------------------------------------------------
13
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS (CONTINUED)
PER SHARE OF COMMON STOCK (UNAUDITED)
------------------------------------------------------
TOTAL DIVIDEND
DIVIDENDS NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE(1)
--------- --------- ------------- ------------
December 31, 2004 - EXTRA ......................... $0.0650 $15.89 $18.25 $17.34
December 31, 2004 ................................. 0.0950 15.89 18.25 17.34
January 31, 2005 .................................. 0.0950 16.12 18.30 17.39
February 28, 2005 ................................. 0.0950 16.03 18.77 17.83
--------------------
(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 payment 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.
14
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DIRECTORS
Martin Brody
Donald F. Crumrine, CFA
Robert M. Ettinger, CFA
David Gale
Morgan Gust
Robert F. Wulf, CFA
OFFICERS
Donald F. Crumrine, CFA
Chairman of the Board
and Chief Executive Officer
Robert M. Ettinger, CFA
President
R. Eric Chadwick, CFA
Chief Financial Officer,
Vice President, Treasurer
and Secretary
Peter C. Stimes, CFA
Chief Compliance
Officer and Vice President
Bradford S. Stone
Vice President
Laurie Lodolo
Assistant Compliance Officer,
Assistant Treasurer and
Assistant Secretary
INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: flaherty@pfdincome.com
QUESTIONS CONCERNING YOUR SHARES OF FLAHERTY &
CRUMRINE PREFERRED INCOME FUND?
o If your shares are held in a Brokerage
Account, contact your Broker.
o If you have physical possession of your shares
in certificate form, contact the Fund's Transfer
Agent & Shareholder Servicing Agent --
PFPC Inc.
P.O. Box 43027
Providence, RI 02940-3027
1-800-331-1710
THIS REPORT IS SENT TO SHAREHOLDERS OF FLAHERTY & CRUMRINE PREFERRED 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.
[GRAPHIC OMITTED]
LIGHTHOUSE LOGO ART
FLAHERTY & CRUMRINE
=====================
PREFERRED INCOME FUND
Quarterly
Report
February 28, 2005
web site: www.preferredincome.com