DFP Flaherty and Crumrine Dynamic Pfd and Income Fund Inc

Semi-Annual Report
May 31, 2021

Flaherty & Crumrine Dynamic Preferred and Income Fund

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

Preferred securities and contingent-capital securities (“CoCos”) had a strong showing during the second fiscal quarter, resulting in very good returns for the first six months of the fiscal year. Total return¹ on net asset value (“NAV”) was 5.4% for the second fiscal quarter² and 6.7% for the first half of the fiscal year. Total return on market price of Fund shares over the same periods was 4.4% and 8.3%, respectively.

(1)Since inception on May 29, 2013.

(2)The Bloomberg Barclays U.S. Aggregate Index is an unmanaged index considered representative of the U.S. investment grade, fixed-rate bond market.

(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.

The first fiscal quarter of 2021 was only slightly positive as markets juggled a mix of news on the economy, interest rates, and COVID-19. December and January were the highest months on record for COVID infections. A combination of holidays, related travel, and variable compliance with safer-at-home restrictions all contributed to increased infections and concern about continued spread of this dangerous virus. At the same time, progress on vaccine development and deployment were extremely positive. Uncertainty on one hand, and optimism on the other kept markets in a state of flux.

Throughout this pandemic, the most consistent – and arguably most important – market force has been the Federal Reserve. In addition to supporting markets as the pandemic unfolded in 2020, the Fed updated its policy approach to help ensure full recovery of the U.S. economy – keeping monetary policy highly accommodative through continued asset purchases and low rates, and expressing a desire for higher near-term inflation in hopes of moving average inflation closer to the Fed’s 2% target. Except for U.S. Treasuries, nearly all markets have reacted positively to these policies.

U.S. Treasury markets were less enthusiastic and began to reflect this sentiment starting in February. Expectations for higher inflation, and probably materially higher over the short run, were inconsistent with 10- and 30-year Treasury yields of 0.9% and 1.6%, respectively, and intermediate and long-term interest rates began moving higher. In February alone, 10- and 30-year interest rates rose by 36 bps and 33 bps, respectively. Ten-and 30-year Treasury yields peaked in late March around 1.75% and 2.48%, respectively, and have since trended lower again as markets settled into a new range that is reflective of

¹Following the methodology required by the Securities and Exchange Commission, total return assumes dividend reinvestment.

²March 1, 2021 – May 31, 2021

Fed policy and current economic data. While there is a risk of policy error, with inflation moving higher than expected, markets continue to have faith in both an economic recovery and the Fed’s ability to manage inflation around that recovery.

Preferred and CoCo markets initially reacted negatively in February to higher interest rates, even though duration metrics are quite moderate overall. Developments in the second fiscal quarter, however, have caused markets to improve dramatically from Q1 levels. Progress on vaccination rollout and re-opening of the economy have been impressive and very positive for corporate credit metrics. A global search for yield continues, and fear of missing out by not being invested has taken precedence over higher Treasury rates, causing credit spreads to tighten and prices to rise. Cash continues to flow into fixed-income securities, and preferreds/CoCos continue to offer higher yields than most alternatives – especially risk-adjusted.

In preferred and CoCo markets, call protection allows investors to tolerate lower interest rates for a period of time without reinvestment risk – and we place a high value on call protection in the Fund’s portfolio. Low interest rates and tighter credit spreads arrived as non-call periods ended for a wide swath of the broader preferred market, resulting in advantageous refinancing opportunities for issuers during fiscal Q2. Many securities have been refinanced into lower coupons, but part of the market has been redeemed without replacement. Recent redemptions resulted in a large reinvestment exercise across the preferred market, adding demand to an already technically strong market. Having more call protection in the portfolio than the broader market (especially compared to passive ETF products) and prioritizing it in our management process has resulted in a moderate level of reinvestment within the portfolio, which has helped sustain the Fund’s distributable income. However, persistently low interest rates could outlast call protection and put pressure on income. None of this is new or unusual. The Fund has been through numerous interest rate cycles in the past, and our focus remains on generating attractive long-term income to shareholders.

Broadly speaking, the Fund’s portfolio didn’t change much during the first half of the fiscal year, as current holdings continue to be preferable to most new-issue alternatives – especially in terms of current income. Banks remain our favorite credits, as reflected in our high allocation to the sector. Bank balance sheets strengthened through the pandemic, and earnings are rebounding from already respectable levels in the second half of 2020. Please see our separate discussion topic on recent bank stress test results, as the credit outlook is very positive. Spreads have tightened in the sector, causing certain new-issue coupons to be lower than we might hope – but that properly reflects banks’ strong credit profile. Insurance has also done well, although insurers’ earnings continue to be a step behind banks due to lower investment yields and higher catastrophe losses in recent years.

Progress on COVID vaccine distribution, accommodative monetary policy, and optimism for economic recovery all contributed to a rebound in energy markets. Oil is now back above $70/barrel, up from $40 as recently as Oct 2020 (and of course much lower levels earlier in the pandemic). While the Fund’s modest energy holdings are primarily in pipeline companies that have little direct exposure to oil prices, they do benefit from improved market sentiment and perhaps more reliable pipeline volume estimates looking forward. Increased focus on climate change, especially from the new administration, may continue to cast a shadow on this sector. However, we see ongoing need for a variety of energy sources. While demand for fossil fuels is likely to gradually diminish, pipelines are the most efficient and safest means of distributing them, and we expect these companies will continue to scale back growth plans and adjust to a changing landscape.

There is no question the economic outlook has brightened as the COVID-19 pandemic has eased. Most markets have been out ahead of this improvement, and spread levels already reflect much of this improvement. The low interest-rate environment (although higher than levels six months ago) cuts both ways in terms of outlook – with continued demand for income supporting preferreds and CoCos near-term while also increasing the amount of refinancing available to issuers (call risk), resulting in potentially lower portfolio yields over time. The recent increase in longer-term interest rates has been a welcome change, in our opinion, as it may help keep yields from dropping further. Spreads have tightened to offset much of that move, but if inflation expectations continue to rise as the economy recovers, it could lead to future opportunities in the market.

In the meantime, preferreds and CoCos continue to compare favorably to most other fixed-income alternatives, especially on a risk-adjusted basis. Leverage costs remain near historical lows (given steepness of the yield curve), and the Fund continues to deliver attractive levels of income for shareholders.

We encourage you to read the discussion topics that follow, as we dig deeper into subjects of interest to shareholders. In addition, the Fund’s website, www.preferredincome.com, has been completely redesigned and offers timely and important information. If you haven’t visited recently, please take a moment to enjoy the new design and content.

Sincerely,

The Flaherty & Crumrine Portfolio Management Team

June 30, 2021

Total Return on Market Price of Fund Shares

While our focus is primarily on managing the Fund’s investment portfolio, our shareholders’ actual return is comprised of the Fund’s monthly dividend payments plus changes in the market price of Fund shares. During the six-month period ending May 31, 2021, total return on market price of Fund shares was 8.3%.

Historically, the preferred securities market has experienced price volatility consistent with those of other fixed-income securities. However, since mid-2007 it has become clear that preferred-security valuations, including both the Fund’s NAV and the market price of its shares, can move dramatically when there is volatility in financial markets. The chart below contrasts the relative stability of the Fund’s earlier period with the more recent volatility in both its NAV and market price. Many fixed-income asset classes experienced increased volatility over this period.

¹The ICE BofA 8% Constrained Core West Preferred & Jr Subordinated Securities Index (P8JC) 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%. All index returns include interest and dividend income, and, unlike the Fund’s returns, are unmanaged and do not reflect any expenses.

²The 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.

In a more perfect world, the market price of Fund shares and its NAV, as shown in the above chart, would track more closely. If so, any premium or discount (calculated as the difference between these two inputs and expressed as a percentage) would remain relatively close to zero. However, as can be seen in the chart below, this often has not been the case.

Although divergence between NAV and market price of a closed-end fund is generally driven by supply/demand imbalances affecting its market price, we can only speculate about why the relationship between the Fund’s market price and NAV hasn’t been closer.

Based on a closing price of $29.45 on June 30^th and assuming its current monthly distribution of $0.1617 does not change, the annualized yield on market price of Fund shares is 6.6%. Of course, there can be no guarantee that the Fund’s dividend will not change in the future.

U.S. Economic and Credit Outlook

The U.S. economy continues its recovery from a sharp, pandemic-driven decline in the first half of 2020. Although the economy’s rebound was considerably stronger than many economists expected when the pandemic unfolded, real GDP was still 2.4% smaller in the fourth quarter of 2020 than it was a year earlier and about 4% smaller than it might have been absent the pandemic. However, rapid growth in 2021, including a 6.4% jump in the first quarter, probably pushed real GDP above its 4Q2019 level in the second quarter, and we expect it to be back on its pre-pandemic growth path around the end of 2021. This is testimony to the U.S. economy’s underlying resilience, strong fiscal and monetary policy support, and unprecedented speed in developing and deploying vaccines to fight the novel coronavirus.

After shedding more than 22 million jobs between February and April 2020, the labor market staged an impressive, albeit incomplete, rebound of 15.6 million jobs through June 2021. That means total nonfarm payroll employment remains 6.8 million jobs below the February 2020 peak. Moreover, payrolls are more than 9 million jobs below what they would have been had employment continued to expand at the same pace as in 2019. Similarly, the unemployment rate started 2020 at 3.5%, jumped to 14.8% in April and fell to 5.9% in June 2021.

Despite this incomplete recovery, we are optimistic that most jobs lost during the pandemic will recover as COVID-19 recedes. For example, as consumer demand returns, hotels and restaurants have reopened or expanded services and are hiring employees. As pent-up demand is unleashed, we anticipate employment to jump not just at businesses that were closed or operated at reduced capacity but also at producers and distributors up and down the supply chain. We expect strong employment growth over the remainder of 2021 and into 2022, although GDP is likely to recover ground lost to COVID more rapidly than employment.

Personal income is well above pre-pandemic levels. Transfer payments — stimulus checks, supplemental unemployment benefits and other assistance — largely replaced income lost during the pandemic, and wage and salary income has rebounded strongly over the past year, up 13.8% over 12 months ending in May. Continued employment growth and rising wages should keep income on an upward path as transfer payments diminish.

Personal consumption expenditure (PCE) continues to recover, with demand shifting from goods toward services spending as restaurants, travel and other leisure activities expand. PCE is also above its pre-pandemic peak, up about 4% in May 2021 compared to February 2020. However, spending lagged income, which rose 8.8% over the same period, and consumers have accumulated a large amount of savings as a result. High consumer confidence combined with rising employment and wages, high savings, and simply more things to do as the public health situation improves should drive rapid growth in PCE over coming quarters.

Fueled by fiscal stimulus, highly accommodative monetary policy and a global economic recovery, inflation accelerated substantially. The core PCE deflator excluding food and energy was up 3.4% over 12 months ending in May, and the consumer price index (CPI) excluding food and energy was up 3.8% over the same period. From February 2020 to May 2021, those inflation gauges are up 2.4% and 2.6%, respectively, at an annual rate. We believe inflation has probably peaked on a year-on-year basis for now, but it is likely to remain elevated at least through year-end. It is important to recognize that higher inflation resulting from aggressive fiscal and monetary stimulus is a policy choice, not a policy mistake — at least not yet — but it does raise the risk that inflation becomes stickier than desired.

Monetary policy was unchanged in the first half of fiscal year 2021. The Federal Open Market Committee (FOMC) left the fed funds rate target at 0-0.25%, and the Fed will continue to buy at least $80 billion of Treasuries and $40 billion of agency mortgage-backed securities per month “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.” With the economy likely to regain growth lost to the pandemic by the end of 2021 and inflation up, the Fed is likely to begin dialing back monetary support for the economy sometime over the next few quarters. We expect that by August or September, the Fed will signal a shift to tapering securities purchases beginning in early 2022. That could set the stage for rate hikes in late 2022 or early 2023. Already, the FOMC’s last “dot plot” from June 2021 showed Committee members expect the fed funds rate to increase by 50 basis points (bp) by year-end 2023, up from no change in prior projections and bringing them roughly in-line with market forward rates. The Fed did make one small policy change in June, raising the interest on overnight reserves (IOER, the rate paid on banks’ reserve deposits at the Fed) by 5 bp to 15 bp. That had the effect of pushing short-term benchmark rates, some of which were hovering around 1 bp, a little farther above zero. One could call it a mini tightening, but we view it as step to promote smooth money market functioning.

Credit conditions broadly improved along with the economy in the fiscal year’s first half. Business bankruptcy filings have continued to decline in 2021 and in May were at the lowest level since 2006. Bank loan quality remained good and improved in most categories in the first calendar quarter of 2021 (latest data available). Total bank loan delinquencies and charge-offs in Q1 were flat or down slightly compared to 4Q2019, before the pandemic struck. This is much better loan performance than expected given the severity of last year’s economic slowdown, and problem loans should remain subdued as economic growth continues over coming quarters. Away from banks, other industries that are major issuers of preferred and contingent capital securities remain broadly healthy. Higher interest rates have brightened outlooks for insurance and other financial services, while utilities and communications businesses benefit from faster economic growth. Even energy companies, which seemed most at risk when economic activity plummeted in 2Q2020, revived in recent quarters as a rising economy drove up energy demand and prices.

Strong economic growth and ongoing fiscal and monetary stimulus translate to a favorable credit environment and, over time, a moderately higher interest rate environment, albeit with more inflation risk than we have needed to contemplate for many years. We believe this should favor fixed income sectors with higher credit spreads and moderate interest rate risk — precisely what preferreds offer today. After a sustained rally since market lows in March 2020, corporate credit spreads reached lows not seen since before the global financial crisis. Additionally, near-zero short-term rates, intermediate Treasury yields below 1.5%, record household savings, and ample liquidity leave investors searching for yield. In this environment, we think preferred and contingent capital securities continue to offer high income and attractive risk-adjusted returns to investors.

A Review of 2021 Dodd-Frank Bank Stress Tests

On June 24, The Federal Reserve released its 2021 large-bank Stress Test results. They were mostly as expected, and all 23 banks “passed” the 2021 stress test amid the prevailing global economic recovery. Under the 2021 “severely adverse scenario”, which factored in unemployment peaking at 10.8% and a 55% drop in the stock market, the average common equity Tier 1 (CET1) capital ratio for this year’s bank participants was 10.6% versus 9.9% in the June 2020 test. Improved year-over-year capital levels reflect both sizable reserves that remain available to absorb loan losses and retained earnings accretion from the elimination of share repurchases and caps on dividends during most of 2020. The temporary caps on dividend increases and share repurchases were removed by the Fed effective June 30, 2021.

Our main takeaway from this year’s stress test is that these large banks remain “well-capitalized,” reporting higher capital levels, and no bank breached minimum capital requirements during the two-year stress period.³ However, while CET1 improved under the 2021 “severely adverse scenario,” average Tier 1 leverage and supplemental leverage ratios were lower than 2020 stress test results. This was due primarily to sizable deposit growth across the U.S. banking system, which in turn was driven by a nearly $4 trillion expansion of the Federal Reserve’s balance sheet. These deposits were invested mostly in low-risk Treasuries and Agency mortgage-backed securities (MBS). These securities reduce a bank’s leverage ratio (which include substantially all assets, regardless of risk weight) but have little impact on risk-weighted capital ratios such as CET1. In fact, 4Q20 risk-weighted assets (RWA) were 11% lower than 4Q19 RWAs. This was attributable to (1) larger U.S. Treasury and Agency MBS securities portfolios, (2) Paycheck Protection Program loans (0% risk weight) replacing declining commercial and industrial (C&I) loan volumes with high risk weights, and (3) lower balances on consumer loans, including credit cards, residential mortgages and home equity loans. Under all scenarios, the 23 large banks maintained capital buffers that were significantly above the Fed’s required minimum, after capital actions.

The Fed also conducted its 2021 Comprehensive Capital Analysis and Review (CCAR) to evaluate banks’ capital plans in light of the stress tests. In contrast to past years, the revised SCB generally removes a requirement for banks to request prior approval from the Fed for incremental capital distributions. As a result, each bank will have more flexibility to increase dividends and share repurchases if earnings accelerate during 2H21 as projected. Our main CCAR takeaway is that banks are exercising greater discipline regarding common shareholder returns than in prior years (a surprise to analysts that expected even bigger increases in dividends and share buybacks). As a result, capital cushions should be higher, adding to banks’ resilience and continuing to support preferred investors.

Monthly Distributions to Fund Shareholders

As mentioned in the letter to shareholders, the Federal Reserve has been an important market force throughout this pandemic. Interest rates remain at very low levels across the entire curve, even though we’ve seen some steepening of the curve this year as prospects for recovery from the pandemic have improved. Leverage cost, which is based on short-term rates, has remained at historically low levels during the pandemic, while top-line income has been a bit more volatile and has trended lower recently given a refinancing wave in the preferred market.

Changes in leverage cost and top-line portfolio income are incorporated into the Fund’s dividend-setting process and are also a normal part of the way credit markets function. Interest rates are not static, and neither are credit spreads. The portfolio is designed to have a wide range of coupons, call protection, and security structures — and each aspect will change over time. We seek to maintain call protection that staggers the impact of changes in interest rates and credit spreads, but the portfolio will normally contain at least some securities subject to being called based on current market conditions. The Fund’s monthly dividend was adjusted modestly lower starting with the May 2021 distribution, reflecting the net effect of these changes in top-line income and leverage cost. Leverage is utilized in the Fund to increase income and returns to shareholders, and leverage continues to enhance distributable income.

The Federal Reserve appears content with an accommodative monetary policy stance for now, which means interest rates could remain low for an extended time. In the case of a policy error, however, rates could also adjust more quickly. Over the near-term, we expect leverage costs to remain low, and top-line income to be under pressure at the margin from tighter credit spreads and refinancing of older securities. We believe the Fund’s strategy of investing in preferred securities and using leverage in an efficient manner will continue to produce a competitive distribution rate for shareholders.

³For stress test purposes, the benchmark for a “well-capitalized” bank remains common equity Tier 1 (CET1) of 4.5% of risk-weighted assets plus a specific Global Systemically Important Bank Holding Company (GSIB) surcharge, where applicable. To pass the stress test, a bank’s projected CET1 ratio must remain above that benchmark by a certain amount, called the Stress Capital Buffer (SCB). The Fed sets the SCB requirement for each of the banks each year. In 2021, most banks saw little to no change, although several, including Citigroup Inc and Wells Fargo & Company’s SCBs rose by about ½% this year. For quarterly reporting purposes, minimum CET1 for a “well-capitalized” bank remains the sum of the 4.5%, a GSIB surcharge, if any, and the specific SCB assigned to each individual bank.

Electing Delivery Preferences

The Securities and Exchange Commission (“SEC”) in recent years made substantial changes to reporting requirements for closed-end investment companies such as the Fund. Among those changes is the option for funds to save on printing and mailing costs by providing electronic access to shareholder reports and notice of their availability. The Fund is no longer required to mail printed shareholder reports unless a shareholder specifically requests a paper copy. Under the new rules, which the Fund adopted this year, shareholders fall into one of three groups.

1.Shareholders who have requested electronic delivery of the report (“edelivery”), either directly from their financial intermediary (if holding shares in “street name” in a brokerage account) or from the Fund (if holding “registered shares” at BNY Mellon/Computershare, the Fund’s transfer agent). When you sign up for edelivery, you will receive an email notification and a weblink to the shareholder report when it is available. If you already elected edelivery, you will not be affected by the new rule and you need not take any action.

2.Shareholders who have requested a printed shareholder report. Once again, this can be done either directly through your financial intermediary or from the Fund (if holding registered shares). Shareholders requesting a printed report will receive it via postal mail.

3.All other shareholders will receive mailed notice that a report is available, along with a web address where it can be accessed via the internet.

Please note, most shareholders hold shares in street name in their brokerage account (rather than registered shares) and should select their delivery preference with their financial intermediary.

We encourage shareholders to choose edelivery. You will receive reports sooner than via postal mail. It’s better for the environment. And it saves the Fund money; printing and mailing reports or notices is expensive, and shareholders bear those expenses. Nonetheless, if you want a printed report, you may request it at no cost to you.

We would like to minimize mailed notices. Postal mailing of notices containing only a website link — while required in the absence of an edelivery election — is not cost effective for the Fund, which is why an edelivery election is the recommended option.

Summarizing how to specify your delivery preferences:

If you hold Fund shares in your brokerage account (most shareholders) and have not already selected your delivery preferences, contact your financial intermediary and request edelivery or printed reports. If you received a mailed notice, specific instructions are printed there.

If you hold shares at the Fund’s transfer agent, BNY Mellon/Computershare, and have not already selected your delivery preferences, contact the transfer agent and request edelivery or printed reports by telephone at 1-866-351-7446 (U.S. toll-free) or +1 (201) 680 6578 (International) or postal mail at BNY Mellon c/o Computershare, P.O. Box 505000, Louisville, KY, 40233-5000, United States.

You may change your delivery preferences at any time. There is no cost to you under any delivery option. In general, elections will apply to all funds held in your account at that financial intermediary. Likewise, your election to receive reports in paper will apply to all funds held with the fund complex if you invest directly with the Fund.

Thank you for taking the time to make your delivery election!

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

PORTFOLIO OF INVESTMENTS

May 31, 2021 (Unaudited)

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

STATEMENT OF ASSETS AND LIABILITIES

May 31, 2021 (Unaudited)

Flaherty & Crumrine Dynamic Preferred and Income Fund Incorporated

STATEMENT OF OPERATIONS

For the Six Months Ended May 31, 2021 (Unaudited)

†For Federal income tax purposes, a significant portion of this amount may not qualify for the inter-corporate dividends received deduction (“DRD”) or as qualified dividend income (“QDI”) for individuals.