Flaherty & Crumrine Dynamic Preferred and Income Fund : DFP 2023 Semi-Annual Report

Semi-Annual Report

May 31, 2023

www.preferredincome.com

Flaherty & Crumrine Dynamic Preferred and Income Fund

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

The first half of the fiscal year was a tale of two quarters, with markets rebounding sharply in fiscal-Q1 after a weak performance in 2022, then taking another step backwards in fiscal-Q2 in response to regional bank concerns. Total return1 on net asset value ("NAV") was -10.2% for the second fiscal quarter2 and -4.4% for the first half of the fiscal year. Total return on market price of Fund shares over the same periods was -11.7% and -7.3%, respectively.

TOTAL RETURN ON NET ASSET VALUE

For Periods Ended May 31, 2023

	Actual Returns		Average Annualized Returns
	Three	Six	One		Three	Five	Ten	Life of
	Months	Months	Year		Years	Years	Years	Fund(1)
Flaherty & Crumrine Dynamic Preferred and
Income Fund	-10.2%	-4.4%	-9.8%	0.5%	2.3%	5.7%	5.7%
Bloomberg US Aggregate Bond Index(2)	2.0%	2.0%	-2.1%	-3.6%	0.8%	1.4%	1.4%
S&P 500 Index(3)	5.7%	3.3%	2.9%	12.9%	11.0%	12.0%	11.8%

1. Since inception on May 29, 2013.
2. The Bloomberg US Aggregate Bond Index is a broad-based index that measures the investment grade, US dollar-denominated,fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-ratepass-throughs), ABS and CMBS (agency and non-agency).
3. The S&P 500 is a capitalization-weighted index of 500 common stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. In addition, NAV performance will vary from market price performance, and you may have a taxable gain or loss when you sell your shares.

Fiscal-Q1 NAV returns experienced a nice rebound from the weakness of 2022, with the strongest performance concentrated in January. A turn of the calendar meant the end of tax-loss selling, which turned out to be a meaningful drag on market performance in late 2022 - probably more than investors realized at the time. Modestly favorable economic news in January, including some improvement on inflation, helped push Treasury yields lower and further supported a sentiment change. Markets experienced a few false-starts in 2022, anticipating the Federal Reserve was nearing an end to its tightening cycle, and January was the latest bout of optimism.

While a market recovery was a welcome change from 2022, much uncertainty remained, and investors continued to focus on the outlooks for inflation, economic growth, and Fed policy. Lower Treasury yields were mostly concentrated in the mid- to long-term parts of the curve, resulting in near-record levels of Treasury yield-curveinversion-an indication that markets believed the Fed was likely to overshoot with rate hikes and push the economy into a recession. Economic data over the subsequent months was modestly encouraging, but it also demonstrated inflation was sticky and improvement toward the Fed's goal could be slow. The Fed raised its benchmark rate 25 bps at each Federal Open Market Committee (FOMC) meeting in February, March, and May-finally pausing at the June meeting but indicating additional hikes are likely to be necessary.

1. Following the methodology required by the Securities and Exchange Commission, total return assumes dividend reinvestment.
2. March 1, 2023 - May 31, 2023

New issue markets came alive once again in early 2023, and overall, the offerings looked attractive. There was a mix of U.S. preferred and foreign contingent capital (CoCo) issuance, most with front-end coupons that reflected the substantial increase in interest rates over the prior year. U.S. banks issued in a range of 6.25%-7.375%front-end coupon, while CoCo securities came in a range of 7.50%-8.25%. Much of this issuance qualified for QDI tax rates, which boosted taxable-equivalent yields to 8.0-10.5%.Back-end spreads mostly remained in the 300-400 bps range, although a few of the U.S. banks were just inside 300 bps-spreads we thought were attractive based on credit metrics of most issuers.

The regional bank panic began after Silvergate Capital (SI), a cryptocurrency-focused bank, entered voluntary liquidation in early March. Soon thereafter, two banks-Silicon Valley Bank (SIVB) and Signature Bank NY (SBNY)-entered receivership after investors and depositors became worried about unrealized losses in investment portfolios and deposits at those banks made a quick exit. Credit Suisse (CS), a Swiss bank, also failed in mid-March due to deposit flight, causing concerns to spread globally. While well-capitalized by regulatory standards, these banks were unable to meet liquidity demands related to deposit outflows-a classic run-on-the-bank-and regulators closed (or in CS's case, merged into UBS) these institutions.

Actions by the Federal Reserve, Federal Home Loan Banks, and Treasury to provide liquidity to US banks (backed by securities and loans) helped stabilize bank balance sheets and sentiment, although it was clear that investor appetite for regional banks had been severely reduced. This bout of market turmoil resulted in significant weakness in regional and community banks, as investors worried about deposit flight expanding more broadly. Another bank, First Republic Bank (FRC), was similarly injured in March, but remained in a state of limbo for weeks as potential suitors evaluated a possible investment. FRC ultimately entered receivership in early May, with most assets being sold to JPMorgan Chase in the process. The Fund's exposure to these names, as a percentage of total managed assets, as of February 28, 2023, was SI: 0%, SIVB: 0.3%, SBNY: 0.4%, CS: 1.0%, and FRC: 0.0%.

Deposit flight was the proximate cause of failure at each of these banks. For the U.S. banks, deposits were concentrated by client type and, in most cases, comprised of large uninsured balances (balances above standard FDIC insurance limits). For U.S. banks, unrealized losses in investment and loan portfolios, brought on by sharply higher interest rates, was the primary concern. Most investors expected unrealized losses to be borne by common stock investors in the form of lower earnings, but the deposits funding those investments simply were not stable enough to support this workout over time. Similarly, CS expected business losses from an ongoing restructuring would continue to be borne by common stock investors over time, but funding (deposits) left the bank with fantastic speed - likely exacerbated by U.S. regional bank problems unfolding around the same time. In all cases, confidence eroded, and deposits withdrew at a rapid pace.

While even a single bank failure is undesirable, we believe the global banking system, consisting of over 5,000 banks, is strong - including most U.S. regional and community banks. Asset-liability mismatches that initially went undetected eventually were exposed when interest rates rose rapidly in 2022 - but the extent of this mismanagement is bank-specific and, in our view, does not threaten the banking system. Accounting and regulatory rules contributed to a delay in its recognition, and there is no question a review of these practices is warranted. However, many sound banks were assumed guilty by association, and preferred prices declined broadly. Calendar-Q1 bank earnings reported in April demonstrated continued strength in earnings, low loan charge-offs, and substantially more deposit stability than feared back in March.

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The path forward for regional banks is well paved but has been lengthened, and we believe confidence will not return quickly. Funding costs have risen, which will pressure net margins and, therefore, earnings. Banks are shoring up liquidity to protect against deposit flight, which will result in higher costs and tighter lending standards. Unrealized losses in investment and loan portfolios likely will require some years to fully resolve but should be borne by common stock investors through lower earnings. Importantly, bank investment portfolios, in general, are very high quality (mostly government-backed securities), and unrealized losses were generated by temporary interest rate exposure, not by potentially permanent credit impairment. Assuming bank funding remains available, we expect that actual losses on these portfolios should be near zero as securities are paid down or mature.

Fixed-income markets, including preferreds and CoCos, have struggled over the last 18 months due to a historically rapid rise in interest rates and, more recently, bank-specific stresses. While the Fed has indicated modest additional tightening may be required and these elevated short-term rates may last longer than expected, markets reflect most of these new realities and, we believe, offer good upside potential moving forward. A peak in short-term rates later this year, and subsequent moves lower in coming years would help widen the Fund's income margin over time and improve distributable income. We believe banks will prove more resilient than current sentiment seems to imply, and current depressed valuations should improve over time. None of this will happen overnight, but in our view the long-term outlook for preferreds and CoCos is attractive at current levels.

Sincerely,

The Flaherty & Crumrine Portfolio Management Team June 30, 2023

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DISCUSSION TOPICS

(Unaudited)

Fund Performance

The table below presents a breakdown of the components that comprise the Fund's total return on NAV over the recent six months. These components include: (a) total return on the Fund's portfolio of securities; (b) the impact of utilizing leverage to enhance returns to shareholders and accretive impact of the Fund's at-the-market program ("ATM Program"); and (c) Fund operating expenses. When these components are added together, they comprise total return on NAV.

Components of DFP's Total Return on NAV for the Six Months Ended May 31, 20231

Total Return on Unleveraged Securities Portfolio (including principal change and income)	-1.4%
Impact of Leverage (including leverage expense) and ATM Program	-2.4%
Expenses (excluding leverage expense)	-0.6%
1Actual, not annualized	Total Return on NAV	-4.4%

For the six-months ended May 31, 2023 the ICE BofA 8% Constrained Core West Preferred & Jr Subordinated Securities IndexSM (P8JC)1,2 (Benchmark Index) returned 0.3%. This index reflects various segments of the preferred securities market constituting the Fund's primary focus. Since this index return excludes all expenses and the impact of leverage, it compares most directly to the top line in the Fund's performance table above (Total Return on Unleveraged Securities Portfolio).

While our focus is primarily on managing the Fund's investment portfolio, a shareholder's actual return is comprised of the Fund's monthly dividend payments plus changes in the market price of Fund shares. The table and chart below depict total return on net asset value and total return on market price over the preceding 10 fiscal years.

Average Annual Total Returns as of 5/31/23

	Average Annual
	1-Year		5-Year	10-Year
DFP at NAV	-9.8%	2.3%	5.7%
DFP at Market Price	-19.4%	2.0%	4.2%
Benchmark Index	-2.8%	2.2%	4.0%

Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. In addition, NAV performance will vary from market price performance, and you may have a taxable gain or loss when you sell your shares and taxable income when you receive distributions.

1. The Fund's Benchmark Index is the ICE BofA 8% Constrained Core West Preferred & Jr Subordinated Securities Index (P8JC), which includes U.S. dollar- denominated investment-grade or below investment-grade, fixed rate, floating rate or fixed-to-floating rate, retail or institutionally structured preferred securities of U.S. and foreign issuers with issuer concentration capped at 8%. Index returns include interest and dividend income, and, unlike the Fund's returns, are unmanaged and do not reflect any expenses.
2. The benchmarks from ICE Data Indices, LLC ("ICE Data") are used with permission. ICE Data, its affiliates and their respective third-party suppliers disclaim any and all warranties and representations, express and/or implied, including any warranties of merchantability or fitness for a particular purpose or use, including the indices, index data and any data included in, related to, or derived therefrom. Neither ICE Data, its affiliates nor their respective third-party providers shall be subject to any damages or liability with respect to the adequacy, accuracy, timeliness or completeness of the indices or the index data or any component thereof, and the indices and index data and all components thereof are provided on an "as is" basis and your use is at your own risk. ICE Data, its affiliates and their respective third-party suppliers do not sponsor, endorse, or recommend Flaherty & Crumrine Incorporated, or any of its products or services.

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