FLAHERTY & CRUMRINE PREFERRED INCOME FUND
To the Shareholders of the Flaherty & Crumrine Preferred Income Fund ("PFD"):
The first fiscal quarter of 2006 was a mixed bag for PFD. On the plus
side, for the three-month period ended February 28, 2006, the Fund produced a
total return on net asset value of +3.8%. Despite this strong investment
performance, net income available to shareholders has declined, and the Fund
reduced its monthly dividend by 5.0% (from $0.0905/share to $0.086/share),
beginning with the March distribution. The focus of the Fund is income, so the
decision to reduce the dividend was difficult, but necessary.
The total return calculation mentioned above has two basic components--net
income earned and net change in principal value. Recently, the latter has done
well while the former has come under some pressure.
Net income earned, the amount of investment income left over after
payments on the Fund's Money Market Preferred ("MMP(R)") shares and other
expenses, is what the Fund can pay out in monthly distributions to common
shareholders. Although investment income has increased recently, payments to
MMP(R) shares have risen at a faster pace. As a result, the Fund could not
continue to distribute common dividends at the same rate.
The MMP(R) rate is closely correlated to other short-term interest rates,
all of which have moved up in concert with the Federal Reserve's efforts to
influence the pace of economic activity. The MMP(R) rate has risen from a low of
1.02% in April 2004 to 3.35% in March 2006. Despite this jump in rates, the use
of MMP(R) leverage continues to add incremental income for common shares because
the money we obtain from leverage is being invested in securities with much
higher yields.
The other component of total return, principal change, normally is not
distributed to common shareholders, but instead is reflected by changes in the
Fund's net asset value. During the fiscal period, the Fund's NAV rose 2.0%.
One last comment on total return--whatever the breakdown between net
income and principal change, the entire amount belongs to common shareholders.
In addition, the two tend to "merge" over time. For example, if principal value
increases and the Fund can realize gains, the Fund will have more money to
invest and can generate additional income. Or, shareholders can use the income
they receive to purchase additional shares via the Dividend Reinvestment Plan to
increase the value of their investment.
As readers may recall from previous discussions of market conditions, the
preferred securities market has two main segments--issues that pay dividends and
those that pay interest. We refer to the first type as "traditional" preferred
stock and the second as "hybrid" preferred securities.
Investor demand for traditional preferred stock has been consistently
strong for some time now; however new issue supply has not kept up--during the
last fiscal quarter there were only two new issues, totaling a meager $300
million. As a result of this imbalance, this segment has slowly and steadily
outperformed other types of fixed-income securities. The solid performance of
PFD reflects the portfolio's emphasis on traditional preferred stock.
Although demand for hybrid securities has also been strong for some time,
the supply of new hybrid preferred has greatly exceeded the supply of
traditional preferred. During the period there were thirty new hybrid issues
with a market value of $13.2 BILLION. As expected, many of these new issues were
structured like the "ECAP" issues we discussed in our last letter (and on the
Fund's website). Even with this sizable amount of new supply, the performance of
this segment kept pace with most other types of fixed-income securities during
the quarter.
Many of the recent hybrid preferred securities have terms and features
that require very close scrutiny. While the basic structure of the enhanced
capital security is now fairly well established, with each new issue we are
observing small but important differences. This evolutionary process is typical
of new structures--our job is to dissect each issue until we fully understand
every twist and turn.
The Fund's hedge positions are intended to provide shareholders with some
protection against significant increases in long-term interest rates. Over the
course of the fiscal quarter, long-term interest rates barely moved, so the
hedging strategy had little impact on the Fund's performance. The Fund's hedging
strategy did benefit from the "flat" U.S. Treasury yield curve, since the cost
of our hedges tends to be lower in this environment.
We hope investors will 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. In addition, some of the topics mentioned above are
analyzed in greater depth in the Frequently Asked Questions section of the
website.
Sincerely,
/s/ Donald F. Crumrine /s/ Robert M. Ettinger
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
April 17, 2006
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OVERVIEW
FEBRUARY 28, 2006 (UNAUDITED)
------------------------------------------------------
FUND STATISTICS ON 02/28/06
--------------------------------------------------------------------------------
Net Asset Value $ 15.57
Market Price $ 16.65
Premium 6.94%
Yield on Market Price 6.52%
Common Shares
Outstanding 10,396,941
MOODY'S RATINGS % OF PORTFOLIO
--------------------------------------------------------------------------------
AAA 0.7%
AA 4.0%
A 20.6%
BBB 45.9%
BB 16.2%
Not Rated 11.4%
--------------------------------------------------------------------------------
Below Investment Grade* 17.8%
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND S&P.
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
INDUSTRY CATEGORIES % OF PORTFOLIO
--------------------------------------------------------------------------------
Utilities 37%
Banks 29%
Financial Services 12%
Insurance 11%
Oil and Gas 4%
REITs 4%
Other 3%
TOP 10 HOLDINGS BY ISSUER % OF PORTFOLIO
--------------------------------------------------------------------------------
Interstate Power 5.3%
Lehman Brothers 4.2%
FBOP Corporation 3.7%
North Fork Bancorporation 3.5%
Xcel Energy 3.2%
SLM Corporation 3.2%
Principal Financial Group 3.1%
HSBC 2.9%
Cobank 2.8%
Entergy Louisiana 2.7%
% OF PORTFOLIO**
-----------------------------------------------------------------------------------------------------------
Holdings Generating Qualified Dividend Income (QDI) for Individuals 70%
Holdings Generating Income Eligible for the Corporate Dividend Received Deduction (DRD) 66%
-----------------------------------------------------------------------------------------------------------
** 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.
3
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 2006 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
-------------- -------
PREFERRED SECURITIES -- 97.1%
BANKING -- 27.8%
------------------------------------------------------------------------------------------------------------------------
$ 3,000,000 Astoria Capital Trust I, 9.75% 11/01/29 Capital Security, Series B ............... $ 3,520,410
54,700 BAC Capital Trust I, 7.00% Pfd. 12/15/31 ......................................... 1,401,414
$ 750,000 Barnett Capital II, 7.95% 12/01/26 Capital Security .............................. 794,437
$ 250,000 Chase Capital I, 7.67% 12/01/26 Capital Security ................................. 263,605
74,700 Citigroup Capital VIII, 6.95% Pfd. ............................................... 1,905,970
Cobank, ACB:
50,000 7.00% Pfd., 144A**** ........................................................... 2,594,250*
75,000 Adj. Rate Pfd., 144A**** ....................................................... 4,110,000*
$ 500,000 Comerica (Imperial) Capital Trust I, 9.98% 12/31/26 Capital Security, Series B ... 553,162
22,300 BAC Capital Trust III, 7.00% Pfd. ................................................ 570,546
9,000 FBOP Corporation, Adj. Rate Pfd., 144A**** ....................................... 9,067,500*
$ 2,250,000 First Hawaiian Capital I, 8.343% 07/01/27 Capital Security, Series B ............. 2,417,096(1)
First Republic Bank:
200,000 6.25% Pfd. ..................................................................... 4,944,000*
53,700 6.70% Pfd. ..................................................................... 1,375,526*
$ 1,500,000 First Union Capital II, 7.95% 11/15/29 Capital Security .......................... 1,893,960
$ 7,820,000 GreenPoint Capital Trust I, 9.10% 06/01/27 Capital Security ...................... 8,495,218
$ 3,000,000 HBOS Capital Funding LP, 6.85% Pfd. .............................................. 3,028,935(1)
32,625 HSBC Holdings PLC, 6.20% Pfd., Series A .......................................... 811,710**(1)
5,000 HSBC Series II, Variable Inverse Pfd., Pvt. ...................................... 5,450,000*
6,480 J.P. Morgan Chase & Co., 6.625% Pfd., Series H ................................... 328,342*
$ 2,000,000 Keycorp Capital VII, 5.70% 06/15/35 Capital Security ............................. 1,919,950
$ 270,000 Keycorp Institutional Capital B, 8.25% 12/15/26 Capital Security ................. 286,654
$ 674,000 NB Capital Trust II, 7.83% 12/15/26 Capital Security ............................. 712,479
16,000 PFGI Capital Corporation, 7.75% Pfd. ............................................. 425,280
$ 1,700,000 RBS Capital Trust B, 6.80% Pfd. .................................................. 1,718,734**(1)
$ 774,000 Republic New York Capital II, 7.53% 12/04/26 Capital Security .................... 814,863(1)
10 Roslyn Real Estate, 8.95% Pfd., Series C, 144A**** ............................... 1,112,685
1,100 Suntrust Capital V, 7.05% Pfd. 12/15/31 .......................................... 28,182
87,500 USB Capital VIII, 6.35% Pfd. 12/29/65 ............................................ 2,216,375
$ 3,500,000 Washington Mutual Preferred Funding, Variable Rate Pfd. 03/29/49, 144A**** ....... 3,459,470
40,000 Zions Capital Trust B, 8.00% Pfd. 09/01/32 ....................................... 1,037,200
-------------------------------------------------------------------------------------------------------------------
67,257,953
-------------
FINANCIAL SERVICES -- 12.2%
------------------------------------------------------------------------------------------------------------------------
141,000 CIT Group, Inc., 6.35% Pfd., Series A ............................................ 3,701,955*
50,000 Fannie Mae, 4.75% Pfd., Series M ................................................. 2,162,250*
53,500 Goldman Sachs Group, Inc., 6.20% Pfd., Series B .................................. 1,399,025*
4
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2006 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
-------------- -------
PREFERRED SECURITIES -- (CONTINUED)
FINANCIAL SERVICES -- (CONTINUED)
------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Holdings, Inc.:
43,780 5.67% Pfd., Series D ........................................................... $ 2,223,367*
154,475 5.94% Pfd., Series C ........................................................... 7,927,657*
3,000 Merrill Lynch Series II STRIPES Custodial Receipts, Pvt. ......................... 3,120,000*
55,000 Morgan Stanley Capital Trust VI, 6.60% Pfd. ...................................... 1,393,700
136,855 SLM Corporation, 6.97% Pfd., Series A ............................................ 7,622,824*
-------------------------------------------------------------------------------------------------------------------
29,550,778
-------------
INSURANCE -- 11.3%
------------------------------------------------------------------------------------------------------------------------
40,000 ACE Ltd., 7.80% Pfd., Series C ................................................... 1,045,600**(1)
Aegon NV:
40,000 6.375% Pfd. .................................................................... 1,013,600**(1)
25,000 6.50% Pfd. ..................................................................... 631,000**(1)
29,750 Arch Capital Group Ltd., 8.00%, Pfd. ............................................. 756,691**(1)
Axis Capital Holdings:
22,850 7.25%., Pfd., Series A ......................................................... 575,249**(1)
9,300 Variable Rate Pfd., Series B ................................................... 958,597(1)
17,000 Berkley W.R. Capital Trust II, 6.75% 07/26/45 .................................... 424,235
22,000 Endurance Specialty Holdings, 7.75%, Pfd. ........................................ 551,980**(1)
21,000 Everest Re Capital Trust II, 6.20% Pfd., Series B ................................ 491,715(1)
140,000 MetLife Inc., 6.50% Pfd., Series B ............................................... 3,677,100*
275,000 Principal Financial Group, 6.518% Pfd. ........................................... 7,585,875*
$ 4,000,000 Provident Financing Trust I, 7.405% 03/15/38 Capital Security .................... 3,951,300
6,300 Renaissancere Holdings, 7.30% Pfd., Series B ..................................... 158,980**(1)
127,000 Scottish Re Group Ltd., 7.25% Pfd. ............................................... 3,239,135**(1)
7,000 St. Paul Capital Trust I, 7.60% Pfd. ............................................. 178,395
$ 1,250,000 USF&G Capital, 8.312% 07/01/46 Capital Security, 144A**** ........................ 1,585,963
22,850 XL Capital Ltd., 8.00% Pfd. Series A ............................................. 594,100**(1)
-------------------------------------------------------------------------------------------------------------------
27,419,515
-------------
UTILITIES -- 35.6%
------------------------------------------------------------------------------------------------------------------------
Alabama Power Company:
300 4.52% Pfd. ..................................................................... 26,082*
5,734 4.72% Pfd. ..................................................................... 520,561*
200,000 5.30% Pfd. ..................................................................... 4,979,000*
10,000 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 ........................ 1,039,350*
Central Hudson Gas & Electric Corporation:
5,000 4.35% Pfd., Series D, Pvt. ..................................................... 437,250*
900 4.96% Pfd., Series E, Pvt. ..................................................... 83,970*
5
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2006 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
-------------- -------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
------------------------------------------------------------------------------------------------------------------------
11,119 Central Vermont Public Service Corporation, 8.30% Sinking Fund Pfd., Pvt. ........ $ 1,154,541*
Connecticut Light & Power Company:
2,124 4.50% Pfd., Pvt. ............................................................... 85,523*
34,300 5.28% Pfd., Series 1967 ........................................................ 1,650,344*
1,905 6.56% Pfd., Series 1968 ........................................................ 98,384*
15,778 $3.24 Pfd. ..................................................................... 825,268*
2,100 Consolidated Edison Company of New York, 4.65% Pfd., Series C .................... 188,926*
2,886 Dayton Power and Light Company, 3.90% Pfd., Series C ............................. 196,133*
$ 1,500,000 Dominion Resources Capital Trust III, 8.40% 01/15/31 ............................. 1,800,082
Duquesne Light Company:
7,675 4.10% Pfd. ..................................................................... 276,914*
9,190 4.15% Pfd. ..................................................................... 335,619*
910 4.20% Pfd. ..................................................................... 33,634*
40,575 6.50% Pfd. ..................................................................... 2,099,756*
5,490 $2.10 Pfd., Series A ........................................................... 202,910*
5,000 Energy East Capital Trust I, 8.25% Pfd. .......................................... 127,400
Entergy Arkansas, Inc.:
5,574 7.32% Pfd. ..................................................................... 581,006*
11,350 7.40% Pfd. ..................................................................... 1,179,095*
6,253 7.80% Pfd. ..................................................................... 653,032*
3,822 7.88% Pfd. ..................................................................... 398,272*
30,266 $1.96 Pfd. ..................................................................... 757,407*
4,555 Entergy Gulf States, Inc., 7.56% Pfd. ............................................ 448,053*
Entergy Louisiana, Inc.:
36,000 6.95% Pfd., 144A**** ........................................................... 3,725,640*
260 7.84% Pfd. ..................................................................... 27,145*
106,538 8.00% Pfd., Series 92 .......................................................... 2,685,290*
5,000 Entergy Mississippi, Inc., 4.92% Pfd. ............................................ 409,450*
Florida Power Company:
5,157 4.60% Pfd. ..................................................................... 471,092*
18,535 4.75% Pfd. ..................................................................... 1,748,407*
50,000 Georgia Power Capital Trust V, 7.125% Pfd. ....................................... 1,286,500
2,010 Great Plains Energy, Inc., 4.50% Pfd. ............................................ 171,111*
24,000 Gulf Power Company, 6.00% Pfd., Series 1 ......................................... 2,490,480*
$ 3,500,000 Houston Light & Power Capital Trust II, 8.257%, 02/01/37 Capital Security ........ 3,708,862
32,650 Indianapolis Power & Light Company, 5.65% Pfd. ................................... 3,135,543*
384,000 Interstate Power & Light Company, 8.375% Pfd., Series B .......................... 12,781,440*
14,250 Narragansett Electric Company, 4.64% Pfd. ........................................ 671,460*
6
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2006 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
-------------- -------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
------------------------------------------------------------------------------------------------------------------------
Northern Indiana Public Service Company:
3,905 7.44% Pfd. ..................................................................... $ 398,681*
7,465 Adj. Rate Pfd., Series A ....................................................... 375,116*
6,170 Ohio Edison Company, 4.44% Pfd. .................................................. 503,318*
Pacific Enterprises:
27,430 $4.50 Pfd. ..................................................................... 2,394,639*
10,000 $4.75 Pfd., Series 53 .......................................................... 921,500*
Pacific Gas & Electric Co.:
7,600 4.50% Pfd., Series H ........................................................... 151,924*
41,500 5.00% Pfd., Series D ........................................................... 882,912*
79,086 5.00% Pfd., Series E ........................................................... 1,741,078*
PacifiCorp:
1,095 5.40% Pfd. ..................................................................... 110,885*
1,225 $4.56 Pfd. ..................................................................... 103,016*
14,542 $4.72 Pfd. ..................................................................... 1,265,808*
12,333 $7.48 Sinking Fund Pfd. ........................................................ 1,268,387*
9,666 Portland General Electric, 7.75% Sinking Fund Pfd. ............................... 993,520*
5,000 PPL Electric Utilities Corporation, 6.75% Pfd. ................................... 521,950*
10,000 Public Service Company of New Mexico, 4.58% Pfd., Series 1965 .................... 803,400*
San Diego Gas & Electric Company:
1,200 4.40% Pfd. ..................................................................... 20,388*
700 4.50% Pfd. ..................................................................... 12,166*
77,000 $1.70 Pfd. ..................................................................... 1,996,610*
13,100 Savannah Electric & Power Company, 6.00% Pfd. .................................... 351,538*
South Carolina Electric & Gas Company:
25,373 5.125% Purchase Fund Pfd., Pvt. ................................................ 1,303,411*
6,703 6.00% Purchase Fund Pfd., Pvt. ................................................. 341,049*
54,100 Southern California Edison, 4.08% Pfd. ........................................... 1,034,663*
75,000 Southern Union Company, 7.55% Pfd. ............................................... 1,981,500*
$ 750,000 TXU Electric Capital V, 8.175% 01/30/37 Capital Security ......................... 792,109
Union Electric Company:
14,150 4.56% Pfd. ..................................................................... 1,283,547*
4,000 $7.64 Pfd. ..................................................................... 414,320*
12,500 Virginia Electric & Power Company, $7.05 Pfd. .................................... 1,278,688*
11,200 Virginia Power Capital Trust, 7.375% Pfd. 07/30/42 ............................... 286,608
Wisconsin Power & Light Company:
1,220 4.50% Pfd. ..................................................................... 106,555*
546 4.80% Pfd. ..................................................................... 50,377*
13,000 6.20% Pfd. ..................................................................... 1,332,175*
7
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2006 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
-------------- -------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
------------------------------------------------------------------------------------------------------------------------
Xcel Energy, Inc.:
16,030 $4.08 Pfd., Series B ........................................................... $ 1,311,094*
26,200 $4.10 Pfd., Series C ........................................................... 2,153,247*
22,000 $4.11 Pfd., Series D ........................................................... 1,812,580*
17,750 $4.16 Pfd., Series E ........................................................... 1,480,173*
10,000 $4.56 Pfd., Series G ........................................................... 914,100*
-------------------------------------------------------------------------------------------------------------------
86,183,964
-------------
OIL AND GAS -- 4.2%
------------------------------------------------------------------------------------------------------------------------
8,000 Devon Energy Corporation, 6.49% Pfd., Series A ................................... 808,440*
5,985 EOG Resources, Inc., 7.195% Pfd., Series B ....................................... 6,299,272*
$ 1,675,000 KN Capital Trust III, 7.63% 04/15/28 Capital Security ............................ 1,866,578
10,000 Lasmo America Limited, 8.15% Pfd., 144A**** ...................................... 1,084,900*(1)
-------------------------------------------------------------------------------------------------------------------
10,059,190
-------------
REAL ESTATE INVESTMENT TRUST (REIT) -- 4.1%
------------------------------------------------------------------------------------------------------------------------
31,000 AMB Property Corporation, 7.00%, Pfd., REIT, Series O ............................ 788,020
Duke Realty Corporation:
15,000 6.50% Pfd., REIT, Series K ..................................................... 369,375
20,000 6.625% Pfd., REIT, Series J .................................................... 496,500
1,000 Equity Residential Properties, 8.29% Pfd., REIT, Series K ........................ 60,305
50,000 HRPT Properties Trust, 7.125% Pfd., REIT, Series C ............................... 1,252,750
PS Business Parks, Inc.:
16,000 7.00% Pfd., REIT, Series H ..................................................... 396,560
20,000 7.20% Pfd., REIT, Series M ..................................................... 493,700
Public Storage, Inc.:
13,300 6.18% Pfd., REIT, Series D ..................................................... 316,606
109,270 6.45% Pfd., REIT, Series F ..................................................... 2,659,085
10,000 6.45% Pfd., REIT, Series X ..................................................... 246,250
22,500 6.75% Pfd., REIT, Series E ..................................................... 562,838
3,500 7.125% Pfd., REIT .............................................................. 90,843
40,000 Realty Income Corporation, 7.375% Pfd., REIT, Series D ........................... 1,032,400
Regency Centers Corporation:
7,600 6.70% Pfd., REIT ............................................................... 185,478
40,000 7.25% Pfd., REIT ............................................................... 1,004,600
-------------------------------------------------------------------------------------------------------------------
9,955,310
-------------
8
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2006 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
-------------- -------
PREFERRED SECURITIES -- (CONTINUED)
MISCELLANEOUS INDUSTRIES -- 1.9%
------------------------------------------------------------------------------------------------------------------------
13,600 E.I. Du Pont de Nemours and Company, $4.50 Pfd., Series B ........................ $ 1,167,764*
40,000 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** .............................. 3,297,600*
26,000 Touch America Holdings, $6.875 Pfd. .............................................. --*+
-------------------------------------------------------------------------------------------------------------------
4,465,364
-------------
TOTAL PREFERRED SECURITIES
(Cost $218,142,479) ............................................................ 234,892,074
-------------
CORPORATE DEBT SECURITIES -- 1.1%
OIL AND GAS -- 0.2%
------------------------------------------------------------------------------------------------------------------------
15,000 Nexen, Inc., 7.35% Subordinated Notes ............................................ 388,050(1)
-------------------------------------------------------------------------------------------------------------------
388,050
-------------
UTILITIES -- 0.9%
------------------------------------------------------------------------------------------------------------------------
$1,000,000 Duquesne Light Holdings, 6.25% 08/15/35 .......................................... 985,295
45,000 Northern States Power Company, 8.00% ............................................. 1,180,125
-------------------------------------------------------------------------------------------------------------------
2,165,420
-------------
TOTAL CORPORATE DEBT SECURITIES
(Cost $2,492,012) .............................................................. 2,553,470
-------------
COMMON STOCK -- 0.8%
BANKING -- 0.8%
------------------------------------------------------------------------------------------------------------------------
110,000 New York Community Bancorp, Inc. ................................................. 1,850,750*
-------------------------------------------------------------------------------------------------------------------
1,850,750
-------------
TOTAL COMMON STOCK
(Cost $1,917,807) .............................................................. 1,850,750
-------------
9
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2006 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
-------------- -------
OPTION CONTRACTS -- 0.4%
250 April Put Options on June U.S. Treasury Bond Futures, Expiring 03/24/06 .......... $ 515,625+
391 June Put Options on June U.S. Treasury Bond Futures, Expiring 05/26/06 ........... 73,313+
884 June Put Options on June U.S. Treasury Bond Futures, Expiring 05/26/06 ........... 386,750+
-------------------------------------------------------------------------------------------------------------------
TOTAL OPTION CONTRACTS
(Cost $1,170,466) ................................................................ 975,688
-------------
MONEY MARKET FUND -- 1.3%
3,266,070 BlackRock Provident Institutional, TempFund ...................................... 3,266,070
-------------------------------------------------------------------------------------------------------------------
TOTAL MONEY MARKET FUND
(Cost $3,266,070) .............................................................. 3,266,070
-------------
TOTAL INVESTMENTS (Cost $226,988,834***) ............................................ 100.7% 243,538,052
OTHER ASSETS AND LIABILITIES (Net) .................................................. (0.7)% (1,694,073)
-------- -------------
TOTAL NET ASSETS AVAILABLE TO COMMON AND PREFERRED STOCK ............................ 100.0%++ $ 241,843,979
-------- -------------
MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (MMP(R)) REDEMPTION VALUE ............... (80,000,000)
-------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK .......................................... $ 161,843,979
=============
----------
* 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. These securities have been
determined to be liquid under the guidelines established by the Board of
Directors.
(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
10
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)
FOR THE PERIOD FROM DECEMBER 1, 2005 THROUGH FEBRUARY 28, 2006 (UNAUDITED)
--------------------------------------------------------------------------
VALUE
-----
OPERATIONS:
Net investment income ............................................................ $ 3,101,350
Net realized gain/(loss) on investments sold during the period ................... 525,976
Change in net unrealized appreciation/depreciation of investments held
during the period ............................................................ 3,085,827
Distributions to Money Market Cumulative Preferred(TM) Stock
Shareholders from net investment income, including changes in
accumulated undeclared distributions ......................................... (705,333)
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............................. 6,007,820
DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock Shareholders (2) ....... (2,820,604)
-------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS ................................. (2,820,604)
FUND SHARE TRANSACTIONS:
Increase from shares issued under the Dividend Reinvestment
and Cash Purchase Plan ....................................................... 379,395
-------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING
FROM FUND SHARE TRANSACTIONS ................................................. 379,395
-------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK
FOR THE PERIOD ............................................................... $ 3,566,611
=============
---------------------------------------------------------------------------------------------------------
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period .............................................................. $ 158,277,368
Net increase in net assets during the period ..................................... 3,566,611
-------------
End of period .................................................................... $ 161,843,979
=============
----------
(1) These tables summarize the three months ended February 28, 2006 and should
be read in conjunction with the Fund's audited financial statements,
including footnotes, in its Annual Report dated November 30, 2005.
(2) May include income earned, but not paid out, in prior fiscal year.
11
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Flaherty & Crumrine Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS(1)
FOR THE PERIOD FROM DECEMBER 1, 2005 THROUGH FEBRUARY 28, 2006 (UNAUDITED)
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD.
--------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .................................................... $ 15.26
------------
INVESTMENT OPERATIONS:
Net investment income ................................................................... 0.30
Net realized and unrealized gain/(loss) on investments .................................. 0.35
DISTRIBUTIONS TO MMP(R)* SHAREHOLDERS:
From net investment income .............................................................. (0.07)
From net realized capital gains ......................................................... --
------------
Total from investment operations ........................................................ 0.58
------------
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
From net investment income .............................................................. (0.27)
From net realized capital gains ......................................................... --
------------
Total distributions to Common Stock Shareholders ........................................ (0.27)
------------
Net asset value, end of period .......................................................... $ 15.57
============
Market value, end of period ............................................................. $ 16.65
============
Common shares outstanding, end of period ................................................ 10,396,941
============
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
Net investment income+ .................................................................. 5.99%**
Operating expenses ...................................................................... 1.51%**
------------------------------------------
SUPPLEMENTAL DATA:++
Portfolio turnover rate ................................................................. 22%***
Total net assets available to Common and Preferred Stock, end of period (in 000's) ...... $ 241,844
Ratio of operating expenses to total average net assets available to
Common and Preferred Stock .......................................................... 1.01%**
(1) These tables summarize the three months ended February 28, 2006 and should
be read in conjunction with the Fund's audited financial statements,
including footnotes, in its Annual Report dated November 30, 2005.
* Money Market Cumulative Preferred(TM) 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)*.
12
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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, 2005 ...... $0.0905 $15.38 $16.09 $15.38
January 31, 2006 ....... 0.0905 15.43 16.89 16.05
February 28, 2006 ...... 0.0905 15.57 16.65 15.82
----------
(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.
13
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Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
1. AGGREGATE INFORMATION FOR FEDERAL INCOME TAX PURPOSES
At February 28, 2006, the aggregate cost of securities for federal income
tax purposes was $227,273,792, the aggregate gross unrealized appreciation for
all securities in which there is an excess of value over tax cost was
$19,742,322 and the aggregate gross unrealized depreciation for all securities
in which there is an excess of tax cost over value was $3,478,062.
14
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[LOGO] Flaherty & Crumrine
===================
PREFERRED INCOME FUND
Quarterly
Report
February 28, 2006
www.preferredincome.com
DIRECTORS
Donald F. Crumrine, CFA
Chairman of the Board
David Gale
Morgan Gust
Karen H. Hogan
Robert F. Wulf, CFA
OFFICERS
Donald F. Crumrine, CFA
Chief Executive Officer
Robert M. Ettinger, CFA
President
R. Eric Chadwick, CFA
Chief Financial Officer,
Vice President and Treasurer
Chad C. Conwell
Chief Compliance Officer,
Vice President and Secretary
Bradford S. Stone
Vice President and
Assistant Treasurer
Christopher D. Ryan, CFA
Vice President
Laurie C. 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.