DFP: A Solid Fund But a Risky Entry Point in Today's Tariff-Driven Market

The Flaherty & Crumrine Dynamic Preferred and Income Fund (DFP) has long been a stalwart in the closed-end fund (CEF) space, offering investors a steady income stream through its focus on preferred stocks and corporate bonds. With a 6.5% annualized distribution rate and a 10.7% 12-month NAV return, DFP’s fundamentals are undeniably strong. However, the current macroeconomic landscape—dominated by historic tariff wars and their cascading effects—makes this a precarious time to enter the fund. Below, we dissect why DFP is a solid long-term play but a risky bet in April 2025.

The Fund’s Strengths: A High-Yield Anchor in Volatile Markets

DFP’s portfolio is constructed to deliver income first, growth second. As of November 2024, 94.39% of assets are allocated to corporate fixed income, including 51.49% in preferred stocks and 39.69% in corporate bonds. Top holdings like Liberty Mutual Group, MetLife, and Morgan Stanley provide diversification within the financial sector, which has historically been a stable income generator.

The fund’s leverage—38.78% of assets funded by debt—amplifies returns during upswings. While this strategy has fueled DFP’s 20.43% share price return in 2024, leverage becomes a liability in downturns. Pair that with a high 5.11% expense ratio (driven by interest costs), and the fund’s margin for error shrinks when markets falter.

Why Now Is the Wrong Time: Tariffs and Their Ripple Effects

The U.S. tariff policies enacted in April 2025 have created a perfect storm for corporate earnings—and DFP’s portfolio. Key risks include:

1. Input Cost Inflation:

2. Tariffs have pushed up prices for raw materials and finished goods. For instance, motor vehicle prices rose 15% long-term, while textiles and apparel costs jumped 25–29%. These sectors are critical to DFP’s financial holdings, as banks and insurers face margin pressure from companies absorbing these costs.

3. Demand Destruction:

4. The 1.1% GDP growth hit in 2025 translates to reduced consumer spending. Lower-income households, which drive discretionary purchases, face a $2,600 annual loss in purchasing power post-substitution. This dampens demand for goods and services, squeezing corporate profits and, by extension, the value of DFP’s holdings.

5. Supply Chain Fragility:

6. China’s retaliatory tariffs and suspension of critical mineral exports (e.g., rare earth metals) disrupt global supply chains. Sectors like semiconductors and manufacturing—already exposed through DFP’s corporate bond allocations—are particularly vulnerable.

7. Leverage and Liquidity Risks:

8. DFP’s $276.3 million in debt creates leverage-driven volatility. In a slowing economy, the fund’s ability to sustain distributions hinges on stable NAV performance. With a -12.15% discount to NAV (vs. a historical average of -8.79%), investors already pay less than intrinsic value. Further discounts are possible if macro fears intensify.

Key Metrics Underpinning the Caution

• Distribution Sustainability: DFP’s $0.1151 monthly distribution is covered by NAV returns, but this assumes no major defaults in its portfolio. With corporate defaults rising due to tariff-driven stress, this could strain cash flows.
• Z-Score Indicators: The fund’s 3-month Z-Stat of -4.02 signals extreme undervaluation relative to historical norms. While this might tempt contrarian investors, the Z-Score doesn’t account for deteriorating fundamentals.
• Sector Exposure: DFP’s 25%+ allocation to financials leaves it exposed to broader economic slowdowns. Banks and insurers face credit risks as businesses default on loans or see lower demand.

Conclusion: A Solid Fund, But Wait for the Fog to Clear

DFP’s income-focused strategy and 40-year track record under Flaherty & Crumrine make it a compelling long-term holding. However, the current environment—marked by 18% average effective tariffs, 770,000 projected job losses, and a 0.6% permanent GDP contraction—paints a grim picture for corporate profitability.

Investors considering DFP now face three critical risks:
1. Discount Widening: The current -12.15% discount could deepen as tariffs prolong uncertainty.
2. Leverage Backlash: DFP’s 38.78% debt amplifies losses if NAV declines.
3. Distribution Cuts: If underlying issuers face liquidity issues, DFP’s payouts may shrink.

Final Verdict: DFP is a solid fund, but the timing is perilous. Avoid entry until tariff policies stabilize, the discount narrows meaningfully (to -5% or lower), or the U.S.-China trade relationship shows concrete progress. Until then, the risks outweigh the rewards for new investors.

Data as of April 8, 2025. Past performance does not guarantee future results.