Flaherty & Crumrine Dynamic Preferred and Income Fund : DFP 2022 Semi-Annual Report

Semi-Annual Report

May 31, 2022

www.preferredincome.com

Flaherty & Crumrine Dynamic Preferred and Income Fund

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

Like most other fixed-income securities, preferred and contingent-capital ("CoCo") security prices were markedly lower to start the year as investors faced challenging news and market conditions. Total return1 on net asset value ("NAV") was -6.6% for the second fiscal quarter2 and -11.0% for the first half of the fiscal year. Total return on market price of Fund shares over the same periods was -7.2% and -11.5%, respectively.

TOTAL RETURN ON NET ASSET VALUE

For Periods Ended May 31, 2022

						Average
	Actual Returns		Annualized Returns
	Three	Six	One	Three	Five	Life of
	Months	Months	Year	Years	Years	Fund(1)
Flaherty & Crumrine Dynamic Preferred and Income Fund . . .	-6.6%	-11.0%	-9.4%	4.8%	4.8%	7.5%
Bloomberg US Aggregate Bond Index(2) . . . . . . . . . . .	-5.9%	-9.2%	-8.2%		0.0%	1.2%	1.8%
S&P 500 Index(3) . . . . . . . . . . . . . . . . . . . . .	-5.2%	-8.9%	-0.3%		16.4%	13.4%	12.9%

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.

A new wall of worry began to build as we turned calendars to 2022, with inflation levels unseen in over 40 years, concern that Federal Reserve (Fed) policy is behind the curve, and an unprovoked invasion of Ukraine by Russia that began in late February. These worries advanced as interest rates moved higher and the yield curve flattened. Credit spreads widened as mutual funds and exchange-traded funds experienced sizable outflows, and volatility in all markets increased. Spikes in commodity prices related to the Russia- Ukraine war have only heightened inflation concerns. Focus more recently has shifted to consequences of aggressive Fed policy necessary to fight inflation, including the possibility of a recession.

Economists and the Fed had expected inflation to pick up in 2021 as the economy recovered from recession and the COVID-19 pandemic. However, inflation turned out to be much higher, broader, and more persistent than anticipated. Although monetary policy did not spark this inflation - a rapid, global recovery in demand combined with supply constraints did that - it remained very loose. Sharply negative real interest rates and rapid money supply growth accommodated higher inflation. Higher inflation was a policy choice by the Fed as it sought to return employment to pre-pandemic levels. It has turned into a policy mistake - one that the Fed is now attempting to address. The Fed hiked rates by 0.25% in March, 0.50% in May, and another 0.75% in June, and it signaled an aggressive cycle of rate hikes that are projected to bring the fed funds rate to about 3.4% and 3.8% at year-end 2022 and 2023, respectively.

1. Following the methodology required by the Securities and Exchange Commission, total return assumes dividend reinvestment.
2. March 1, 2022 - May 31, 2022

Portfolio performance in the fiscal year's first half was driven by higher interest rates and wider credit spreads. Although portfolio interest-rate duration was intermediate, the move in interest rates has been substantial. Our focus on intermediate duration and call protection - owning fixed-reset or fixed-to-float structures with healthy backend reset spreads and avoiding most low-couponfixed-rate securities - has resulted in less overall impact from higher rates than some other segments of preferred and credit markets. For comparison, Bloomberg US Long Credit1 total return over the same period ending May 31, 2022 was -19.3%, and Bloomberg US Aggregate Bond total return was -9.2% - both are un-levered indices. If reset today, many of the securities held by the Fund would set at higher rates than their initial front-end coupons, although many will not reset for another 2-5 years.

The table below shows benchmark interest rates and cumulative changes since last fiscal year end. The impact of interest-rate duration on the portfolio was largely as expected given these moves (i.e., "intermediate"). However, dramatic credit spread widening was unexpected and had an additional negative impact on performance during the period. Markets loath uncertainty, and much of the move in credit spreads is a result of uncertainty and fear. Market trading depth has been thin and liquidity at a premium, resulting in markets moving lower most days as investors continued to reduce exposure and funds sold securities to meet outflows.

	Interest Rates as of:		Change since 11/30/21:
	11/30/2021	5/31/2022	6/30/2022	5/31/2022	6/30/2022
10-Year Treasury . . . . . . . . . . . .	1.44%	2.84%	2.97%	1.40%	1.53%
30-Year Treasury . . . . . . . . . . . .	1.78%	3.06%	3.12%	1.28%	1.34%
1-Month LIBOR . . . . . . . . . . . . .	0.10%	1.12%	1.78%	1.02%	1.68%

We continue to believe credit quality is a highlight of the preferred and CoCo market, and investors are now earning much higher yields for these credits. Banks remain very well capitalized, highly regulated, and most are asset-sensitive - which means earnings will increase with higher interest rates. Please see our separate discussion topic on recent bank stress test results, as the credit outlook is very positive. Insurance companies have been longing for higher interest rates to boost portfolio yields, and they finally have arrived. Higher interest rates should also reduce pressure on insurance liability calculations. Energy issuers, including pipeline issuers in the case of the Fund's portfolio, have been buoyed by higher commodity prices and potential increases in usage because of a shifting energy landscape. This all stands in contrast to securities of high-yield (junk) issuers, where higher interest rates are likely to be more concerning due to their weaker balance sheets and greater exposure to rising interest costs.

The yield curve has flattened, driven by higher expected short-term interest rates consistent with a Fed tightening cycle. While this should eventually be positive for coupons of most fixed-reset or floating securities, it also means leverage costs are increasing immediately. The Fund remains in a transition stage in terms of distributable income, as top-line income has declined in recent years with issuer redemptions and lower reinvestment rates, while leverage costs are rising rapidly from very low levels and will continue to increase while the Fed hikes rates. Earlier in the year, the Fed expected to move gradually, but its stance changed in response to inflation data, and that resulted in much larger hikes early in the cycle. As shown

1 The Bloomberg US Long Credit Index measures the performance of investment grade, US dollar-denominated,fixed-rate, taxable corporate and government-related debt with at least ten years to maturity. It is composed of a corporate and a non-corporate component that includes non-US agencies, sovereigns, supranationals and local authorities.

2

in the table above, 1-month LIBOR, the benchmark rate for the Fund's leverage, has already increased by over 165 basis points (66 bp of that in June alone) and is forecasted to continue increasing near-term. The Fund will generate lower distributable income until leverage costs stabilize and/or portfolio income levels gradually adjust upward. Consequently, we expect further reductions in common stock dividends over coming months to keep pace with these changes in distributable income. The margin between portfolio income and leverage costs will eventually reach an inflection point and likely begin to expand once again, much like it has done over previous cycles, but it will take time for everything to adjust. Please see our separate discussion topic on the Fund's use of leverage and why it remains a positive contributor to distributable income, despite changes in margin over time.

Fed policy has and likely will continue to tighten financial conditions, and it should be successful in reducing aggregate demand and inflation. However, forecasting the timing and impact of other macroeconomic issues such as supply-chain disruptions, COVID policies, and the Russia-Ukraine war are nearly impossible. Resolution of any one of these issues, let alone all of them, is likely to have a dramatic positive impact on inflation expectations and market sentiment. Preferred and CoCo issuers, along with U.S. consumers broadly, are in a strong position to weather this storm - but time is the only remedy for macroeconomic issues outside the Fed's purview. Holding or adding to investments when markets are lower and sentiment is weak can be uncomfortable for investors, but we believe there is opportunity in preferred and CoCo markets for long-term investors seeking income and solid credit quality.

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 explore the new design and content.

Sincerely,

The Flaherty & Crumrine Portfolio Management Team June 30, 2022

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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, 20221

Total Return on Unleveraged Securities Portfolio (including principal change and income) . . . . . .	-6.9%
Impact of Leverage (including leverage expense) and ATM Program . . . . . . . . . . . . . . .	-3.6%
Expenses (excluding leverage expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . .	-0.5%
1Actual, not annualized	Total Return on NAV	-11.0%

For the six-month period ended May 31, 2022 the ICE BofA 8% Constrained Core West Preferred & Jr Subordinated Securities IndexSM (P8JC)1,2 (Benchmark Index) returned -8.7%. 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 5/31/22

		Average Annual
	1-Year	5-Year	Since Inception
DFP at NAV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	-9.4%	4.8%	7.5%
DFP at Market Price . . . . . . . . . . . . . . . . . . . . . . . . . . .	-14.1%	5.6%	7.2%
Benchmark Index . . . . . . . . . . . . . . . . . . . . . . . . . . .	-8.3%	3.2%	4.7%

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%.
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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