UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-22080
-----------
First Trust Dividend and Income Fund
-----------------------------------------------------------
(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
-----------------------------------------------------------
(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
-----------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: 630-765-8000
--------------
Date of fiscal year end: November 30
-------------
Date of reporting period: May 31, 2016
-------------------
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED
MAY 31, 2016
FIRST TRUST
DIVIDEND AND
INCOME
FUND
(FAV)
CHARTWELL INVESTMENT PARTNERS
------------------------------------------
INSTITUTIONAL AND PRIVATE ASSET MANAGEMENT
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
SEMI-ANNUAL REPORT
MAY 31, 2016
Shareholder Letter.......................................................... 1
At a Glance................................................................. 2
Portfolio Commentary........................................................ 3
Portfolio of Investments.................................................... 6
Statement of Assets and Liabilities......................................... 14
Statement of Operations..................................................... 15
Statements of Changes in Net Assets......................................... 16
Statement of Cash Flows..................................................... 17
Financial Highlights........................................................ 18
Notes to Financial Statements............................................... 19
Additional Information...................................................... 26
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Chartwell Investment Partners, LLC ("Chartwell"
or the "Sub-Advisor") and their respective representatives, taking into account
the information currently available to them. Forward-looking statements include
all statements that do not relate solely to current or historical fact. For
example, forward-looking statements include the use of words such as
"anticipate," "estimate," "intend," "expect," "believe," "plan," "may,"
"should," "would" or other words that convey uncertainty of future events or
outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Dividend and Income Fund (the "Fund") to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
report, you are cautioned not to place undue reliance on these forward-looking
statements, which reflect the judgment of the Advisor and/or Sub-Advisor and
their respective representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's web page at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund and presents data and analysis that
provide insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
First Trust and Chartwell are just that: informed opinions. They should not be
considered to be promises or advice. The opinions, like the statistics, cover
the period through the date on the cover of this report. The material risks of
investing in the Fund are spelled out in the prospectus, the statement of
additional information, this report and other Fund regulatory filing.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV) SEMI-ANNUAL
LETTER FROM THE CHAIRMAN AND CEO
MAY 31, 2016
Dear Shareholders:
Thank you for your investment in First Trust Dividend and Income Fund (the
"Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
semi-annual report which contains detailed information about your investment for
the six months ended May 31, 2016, including a market overview and a performance
analysis for the period. We encourage you to read this report and discuss it
with your financial advisor.
While markets were up and down during 2015, we believe there are three important
things to remember. First, the U.S. economy grew, despite the massive decline in
oil prices. Second, the tapering that began in 2014 by the Federal Reserve (the
"Fed") did not stop growth in the U.S. economy. Finally, the long-anticipated
rate hike by the Fed in December had little effect on the money supply, and the
stock market was not shocked by the hike. Early in 2016, many investors were
concerned that the volatility we saw in the market in 2015 would continue, and
it did. From December 31, 2015 through February 11, 2016, the S&P 500(R) Index
declined by 10.27%. Since then, the market has made a steady comeback, and as of
May 31, 2016, the S&P 500(R) Index was up 15.43%.
First Trust believes that having a long-term investment horizon and being
invested in quality products can help you reach your goals, regardless of how
the market behaves. We have always maintained perspective about the markets and
believe investors should as well. We will continue to strive to provide quality
investment opportunities each and every day, which has been one of the hallmarks
of our firm since its inception 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on helping
investors like you reach your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
"AT A GLANCE"
AS OF MAY 31, 2016 (UNAUDITED)
--------------------------------------------------------------------------
FUND STATISTICS
--------------------------------------------------------------------------
Symbol on New York Stock Exchange FAV
Common Share Price $8.90
Common Share Net Asset Value ("NAV") $9.14
Premium (Discount) to NAV (2.63)%
Net Assets Applicable to Common Shares $75,488,985
Current Quarterly Distribution per Common Share (1) $0.1700
Current Annualized Distribution per Common Share $0.6800
Current Distribution Rate on Closing Common Share Price (2) 7.64%
Current Distribution Rate on NAV (2) 7.44%
--------------------------------------------------------------------------
-----------------------------------------------
COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
-----------------------------------------------
Common Share Price NAV
5/15 $8.74 $10.10
8.64 9.98
8.66 10.00
8.65 10.04
6/15 8.60 10.01
8.48 9.85
8.43 9.83
8.56 9.94
8.21 9.51
7/15 8.23 9.64
8.12 9.54
8.20 9.62
7.84 9.15
8/15 7.81 9.20
7.65 8.95
7.81 9.10
7.81 9.07
9/15 7.72 8.97
7.95 9.03
8.25 9.32
8.33 9.39
8.26 9.30
10/15 8.34 9.28
8.33 9.39
8.06 9.11
8.15 9.28
11/15 8.17 9.32
8.27 9.29
8.07 8.92
8.17 8.91
8.45 9.18
12/15 8.46 9.12
8.05 8.60
7.76 8.41
7.59 8.30
1/16 7.72 8.49
7.65 8.27
7.36 8.13
7.76 8.34
2/16 7.87 8.46
8.20 8.74
8.36 8.85
8.36 8.96
3/16 8.48 8.86
8.69 8.97
8.62 8.92
8.77 9.09
8.72 9.05
4/16 8.80 9.01
8.65 8.96
8.64 8.92
8.72 8.98
8.86 9.16
5/16 8.90 9.14
-----------------------------------------------
--------------------------------------------------------------------------------------------------
PERFORMANCE
--------------------------------------------------------------------------------------------------
Average Annual Total Return
-----------------------------
Inception
6 Months Ended 1 Year Ended 5 Years Ended (9/20/07)
5/31/16 5/31/16 5/31/16 to 5/31/16
Fund Performance (3)
NAV 2.39% -1.83% 5.67% 2.22%
Market Value 13.49% 10.47% 4.71% 1.37%
Index Performance
Russell 1000(R) Value Index 3.12% -0.06% 10.70% 4.50%
S&P 500(R) Index 1.93% 1.72% 11.67% 5.98%
--------------------------------------------------------------------------------------------------
-------------------------------------------------------
% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
-------------------------------------------------------
General Electric Co. 3.7%
Pfizer, Inc. 3.6
Merck & Co., Inc. 3.1
JPMorgan Chase & Co. 3.1
AT&T, Inc. 2.7
Wells Fargo & Co. 2.5
Microsoft Corp. 2.2
Intel Corp. 2.1
Chevron Corp. 2.0
Medtronic PLC 2.0
-------------------------------------------------------
Total 27.0%
======
-------------------------------------------------------
% OF
CREDIT QUALITY (S&P RATINGS)(4) SENIOR LOANS
-------------------------------------------------------
BBB 1.3%
BBB- 3.1
BB+ 4.4
BB 8.0
BB- 16.5
B+ 11.7
B 35.3
B- 9.0
CCC+ 8.4
Privately rated securities 2.3
-------------------------------------------------------
Total 100.0%
======
-------------------------------------------------------
% OF TOTAL
SECTOR ALLOCATION INVESTMENTS
-------------------------------------------------------
Financials 29.2%
Health Care 13.6
Consumer Discretionary 12.0
Consumer Staples 9.7
Energy 9.3
Information Technology 8.9
Industrials 8.7
Telecommunication Services 4.5
Utilities 2.4
Other 0.9
Materials 0.8
-------------------------------------------------------
Total 100.0%
======
(1) Most recent distribution paid or declared through 5/31/2016. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 5/31/2016. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for net asset
value returns and changes in Common Share price for market value returns.
Total returns do not reflect sales load and are not annualized for periods
less than one year. Past performance is not indicative of future results.
(4) Ratings are by Standard & Poor's, except where otherwise noted. A credit
rating is an assessment provided by a nationally recognized statistical
rating organization (NRSRO) of the creditworthiness of an issuer with
respect to debt obligations except for those debt obligations that are
only privately rated. Ratings are measured on a scale that generally
ranges from AAA (highest) to D (lowest). Investment grade is defined as
those issuers that have a long-term credit rating of BBB- or higher. "NR"
indicates no rating. The credit ratings shown relate to the
creditworthiness of the issuers of the underlying securities in the Fund,
and not the Fund or its shares. Credit ratings are subject to change.
Page 2
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
SEMI-ANNUAL REPORT
MAY 31, 2016
Chartwell Investment Partners, LLC ("Chartwell"), a wholly owned subsidiary of
TriState Capital Holdings, Inc., is a research-based equity and fixed-income
manager with a disciplined, team-oriented investment process. TriState Capital
Holdings, Inc., Chartwell's parent company, closed on its acquisition of The
Killen Group on April 29, 2016. The Killen Group is the investment advisor to
the Berwyn Funds. All of The Killen Group's assets and employees became part of
Chartwell. The Killen Group's investment team is the fifth investment team under
the Chartwell umbrella and works independently with no involvement in portfolio
management or other services that Chartwell provides to the Fund. Chartwell
manages the equity component and the options element of the First Trust Dividend
and Income Fund's (the "Fund") strategy. First Trust Advisors L.P. ("First
Trust") manages the senior loan and leverage component of the Fund's strategy.
On March 18, 2016, First Trust announced that the Fund's Board of Trustees
approved the merger of the Fund into First Trust High Income ETF (Nasdaq: FTHI),
an actively managed exchange-traded fund ("ETF") managed by First Trust, and a
series of First Trust Exchange-Traded Fund VI (the "Trust"). FTHI will be the
surviving fund. Under the terms of the proposed transaction, which is expected
to be tax-free, the Fund's assets would be transferred to, and the Fund's
liabilities would be assumed by, FTHI, and the Fund's shareholders would receive
shares of FTHI with a value equal to the aggregate net asset value of the Fund's
shares held by them. It is currently expected that the transaction will be
consummated no later than October 31, 2016, subject to requisite shareholder
approvals, satisfaction of applicable regulatory requirements and approvals, and
customary closing conditions. There is no assurance when or whether such
approvals, or any other approvals required for the transaction, will be
obtained.
PORTFOLIO MANAGEMENT TEAM
DOUGLAS W. KUGLER, SENIOR PORTFOLIO MANAGER, CHARTWELL
PETER M. SCHOFIELD, SENIOR PORTFOLIO MANAGER, CHARTWELL
WILLIAM HOUSEY, CFA, SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER, FIRST
TRUST
SCOTT D. FRIES, CFA, SENIOR VICE PRESIDENT, PORTFOLIO MANAGER, FIRST TRUST
EQUITY MARKET RECAP
The S&P 500(R) Index (the "Index") returned 1.93% (inclusive of dividends) for
the six-month period ended May 31, 2016. Unlike the first half of last fiscal
year which saw one of the narrowest trading ranges on record, these six months
saw a great deal of volatility not only in stocks but in currencies, oil, and
interest rates as well. The Index started the fiscal year only 2.4% from its
record high set in the late spring of 2015. After a little volatility in
December, which saw the market trade within a 100 point range, much larger
volatility set in. The Index suffered its worst ever one-week return to start a
calendar year and the period from the start of 2016 through February 11 was the
worst 28 trading days to start a year in 68 years (down 10.3% inclusive of
dividends). During this period, it seemed as though the markets were
anticipating a coordinated global recession. There were a litany of factors that
contributed to these fears: questions about the stability of the Chinese
currency and stock markets; concerns around the liquidity of European banks;
uncertainty over the impact of negative interest rates in several large
countries; fears of the Federal Reserve (the "Fed") making a policy mistake by
possibly raising rates up to four times in 2016; and weakness in the price of
oil and several economic indicators. However, several things occurred around
February 12th which made the fear of global recession fade and allowed the stock
market to more than recover its losses from those first 28 trading days. Among
them were: better U.S. economic data; the rumor that OPEC was discussing a
production freeze, which reversed the slide in oil prices; with oil prices
recovering, fears over bank credit profiles eased; and various speakers from the
Fed talked down the possibility of the previously discussed four rate hikes. All
of this volatility drove investors into certain groups of stocks that are
considered more 'safe' than other groups. Oil's volatility saw a barrel of Brent
crude go from $45 to start the period to $28 in mid-February only to settle at
$50 at the end of May. Interest rates were another point of focus as the 10-year
U.S. Treasury yield moved from 2.21% at the beginning of the period to 1.66% and
then settled at 1.85% as of May 31, 2016. The yield curve flattened during the
period as the difference between two-year and ten-year U.S. Treasury yields went
from 1.28% to 0.97%. The fixed-income market appears to believe short-term rates
will rise but longer-term economic activity will be subdued.
PERFORMANCE SUMMARY - EQUITY COMPONENT
For the six months ended May 31, 2016, the Fund returned 2.39% based on net
asset value ("NAV") on a total return(1) basis. The Index returned 1.93% and the
Russell 1000(R) Value Index returned 3.12% on a total return basis over the same
period. The equity portion of the Fund's assets was up approximately 2.10% over
the period. The Fund's options overwriting program was essentially
-----------------------------
(1) Total return is based on the combination of reinvested dividends, capital
gains and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for net asset
value returns and changes in Common Share price for market value returns.
Total returns do not reflect sales load and are not annualized for periods
less than one year. Past performance is not indicative of future results
Page 3
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
SEMI-ANNUAL REPORT
MAY 31, 2016
neutral to returns as the large and sharp moves in the market made it difficult
to add value through written options. Returns in the market for the period were
dominated by what we call "safe haven" groups.
When combined, the Utilities, Telecommunications and Consumer Staples groups
accounted for over 78% of the Russell 1000(R) Value's return for the period
while only comprising 16.7% of the average weight during the period. This level
of concentration in returns made it difficult for the Fund to outperform the
benchmark in the period. Within the equity portion of the portfolio, an
underweight in the Utilities group and an overweight in the Consumer
Discretionary group were detrimental to relative performance as the Utilities
group returned an Index best of 17.57% for the period while the Consumer
Discretionary group was down 3.02% which was the worst return of the ten major
groups. An overweight in the Telecommunications group which was up 16.14%
partially offset the negative impacts from the Utilities and Consumer
Discretionary groups. Stock selection in the Financials, Consumer Services and
Consumer Staples groups was a positive contributor to relative returns while
stock selection in the Information Technology, Retailing and Materials groups
detracted from relative performance. Several of the Fund's holdings performed
quite well during the period. Philip Morris (+15.45%), Altria Group (+12.58%),
Verizon Communications (+14.58%), and PPL Corp. (+15.72%) all benefited from
being "safe haven" stocks. In addition, both B&G Foods (+16.29%) and Lamar
Advertising (+14.11%) performed well on better than expected earnings. Of course
not all stocks performed so strongly. L Brands (-31.03%), a retailer and owner
of the Victoria's Secret brand, fell on a surprise negative earnings report and
the announcement of several changes including a change to their promotional
efforts. General Motors (-11.62%) declined on fears that the upswing in car
buying, particularly in the U.S., is waning. Finally, ConocoPhillips (-17.88%)
fell on the announcement that they were reducing their dividend.
EQUITY MARKET OUTLOOK
We have been thinking that the markets would remain volatile - but we did not
expect the level of volatility that was seen in the first quarter of this year.
We believe the almost manic swings between the market's recent highs and lows
have been caused by macro-level events or fears. What is the Fed going to do?
Are there really four more hikes on the way? How will China's economy/stock
market/currency act? Is the decline in oil prices going to cause excessive
defaults in the high-yield bond market and/or ruin the balance sheets of banks?
Are we headed towards a U.S./global recession? Our inclination at this point is
to take the positive side on these issues. We think the Fed has seen what the
fear of moving too fast can do to the U.S. and global markets so we believe they
will act with caution. The Chinese government wants to stay in power and it
appears they will keep attempting to drive their domestic economy higher while
transitioning to more domestic-led growth in GDP (we believe they will be
accepting of a lower growth rate though). We believe the over-supply of oil will
dissipate through increased demand and lower supply - just as a free market
should respond (as long as OPEC continues to be unable to come to an agreement).
Therefore, we believe lenders to oil-related companies will suffer some losses
but not catastrophic losses that would jeopardize the financial system. That is
not to say we believe there is little risk in this market. There is plenty of
risk. Our positive-bias towards these issues can turn out to be wrong. New
issues can (and most certainly will) crop up. Geo-political hotspots exist
throughout the world and any of them could escalate and worry the market as
"Brexit" has done. Lastly, we have seen a rather raucous U.S. presidential
primary season. What happens in the fall during the actual presidential and
congressional elections is anybody's guess. The market has been essentially
unchanged since the start of 2015. So will this respite allow the market to
advance more strongly in the coming years or is it a forbearer of tougher
markets to come? We believe that depends on how the litany of risks we discussed
above play out - including those that are unexpected. But all these
uncertainties can provide positive impetus to stock prices if they are resolved
in a market friendly manner.
Given valuations in the equity markets are above longer-term averages, we
believe that earnings growth will have to improve in order for the equity market
to move substantially higher. While this earnings growth has proven to be more
difficult than in prior years, we believe that certain factors (the sharp oil
price decline, the large rise in the value of the U.S. Dollar) have been strong
headwinds for overall earnings growth and that those factors will not weigh as
much on earnings going forward. Absent a global recession, we believe that
revenues should move higher and companies will continue to be vigilant on
controlling costs thereby keeping margins at or near current high levels.
Therefore, we believe earnings should begin to rise again. In addition, we
believe that the uptick in mergers and acquisitions will continue as will strong
stock repurchases which should help corporations in their search for earnings
growth. Low interest rates have helped facilitate these corporate actions and,
at least in the near-term, we believe rates will remain low enough to continue
to drive these actions.
Our outlook is essentially unchanged. Despite the uncertainties, the economy
should continue to grow at a reasonable, but not overly strong rate, and
corporate profits should begin to resume their growth. This could provide a
solid backdrop for the market going forward. However, with valuation of the
stock market no longer at the lower end of historical norms, and with earnings
growth flattening out, moves higher in the Index will likely be more muted going
forward with the increased likelihood of periods of price declines. No matter
the outcome of these issues, we will manage the Fund with the dual objectives of
generating a high level of current income while seeking capital appreciation
over the market cycle.
Page 4
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
SEMI-ANNUAL REPORT
MAY 31, 2016
PERFORMANCE SUMMARY - SENIOR LOAN COMPONENT
The S&P/LSTA Leveraged Loan Index returned 3.39% for the six-month period ended
May 31, 2016. After a volatile back half to the fourth quarter of 2015 and first
half of the first quarter of 2016, the period following February 11, 2016 was
strongly positive. This volatility was driven in part by what we believed to be
a decoupling of market price volatility from fundamentals. We found that with
any hint of negative news for a given company or industry, senior loans or
high-yield bonds would experience significant volatility. This price action was
warranted in some specific instances, but generally speaking, was in excess of
what we would have expected. The Fund utilizes leverage to purchase senior
loans. The use of leverage contributed positively as the total return of senior
loans exceeded the borrowing cost of leverage. Leverage at the end of May was
approximately 18.9% of managed assets.
SENIOR LOAN MARKET RECAP
The start of 2016 proved to be quite eventful in the capital markets, as equity
market volatility early in the first quarter instilled fear in investors that
the U.S. economy might be slowing and led some to speculate that the U.S.
economy might be heading into a recession. Additionally, the inconsistent
rhetoric from the U.S. Federal Reserve (the "Fed") in the latter half of 2015
and the eventual start to a new rate hike cycle contributed to overall
instability in the broader financial markets. On February 11, 2016, the
low-point for financial markets during 2016, the high-yield bond index was off
5.14% and the senior loan index was off 1.36% year-to-date, according to
Bloomberg. This compared to the Index which was off 10.27% for the same period.
However, as the equity markets bottomed and reversed course, the credit markets
also rebounded and by the end of May 2016, the high-yield bond index and senior
loan index total returns from the trough on February 11th were 14.01% and 5.93%,
respectively. For comparison, the Index rallied 15.43% during that same time
period. Despite the increased volatility, the high-yield index and senior loan
index total return for the 2016 year-to-date period through May 31, 2016 were
8.15% and 4.49%, respectively. The Index total return was 3.57% for the same
time period.
SENIOR LOAN MARKET AND FUND OUTLOOK
Credit markets appear well positioned for the intermediate term. We believe the
combination of strong technical tailwinds created by global central bank policy,
attractive valuations within the credit markets, a below-average default rate
environment, modest but healthy economic growth and sound corporate fundamentals
provide a firm backdrop for returns in the periods ahead. However, we believe
that the volatility that we have experienced since the second half of 2015 may
continue to persist throughout 2016. We believe that this volatility has and
should lead to some compelling valuations and opportunities in the U.S.
high-yield bond and senior bank loan markets. With that said, we believe credit
selection will be paramount to driving strong returns over the remainder of the
economic cycle. In the early years of the economic recovery, returns came
relatively easily. We believe returns can still be healthy for this portion of
the cycle, however, they will be harder to come by, accompanied by greater
volatility in the markets.
Based on current valuations (average price of $93.41 and spread of L+573(2)), we
believe senior loans, given their senior secured position in the capital
structure, floating interest rate, high income and limited commodity exposure
(energy, metals and mining only comprise 3.84% of the senior loan benchmark on a
market value basis), are well positioned to deliver attractive risk adjusted
returns. Retail investors have continued to reduce exposure to senior loans in
the wake of declining Treasury yields and continued dovish Fed rhetoric. We
believe that with further increases in the Federal Funds rate on the horizon,
even if they occur at a modest pace, investors in senior loans are likely to
benefit. We believe there remains a substantial asymmetry in the risk vs. reward
equation for long-duration fixed-income securities (those with the most rate
sensitivity). As a result, even modestly increasing interest rates can present
challenges for traditional fixed-income investors.
In summary, we believe that both the high-yield bond and senior loan markets
currently offer compelling opportunities, and specifically within actively
managed strategies where return opportunities can be realized and risk can be
appropriately managed. In a market where equity volatility is high, investors
may benefit from moving up the corporate capital structure into high-yield bonds
and senior loans to take advantage of the attractive valuations and lower
volatility.
As we evaluate new investment opportunities, decisions will continue to be
rooted in our rigorous bottom-up credit analysis and focus on the opportunities
that we believe offer the best risk and reward balance. Despite the many
distractions that ebb and flow every quarter, we remain firmly focused on
finding value in the high-yield bond and senior loan markets.
-----------------------------
(2) The average spread for the S&P/LSTA Leveraged Loan Index over the London
Interbank Offered Rate (LIBOR).
Page 5
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS
MAY 31, 2016 (UNAUDITED)
SHARES DESCRIPTION VALUE
----------- --------------------------------------------------------------------------------- --------------
COMMON STOCKS - 82.6%
AEROSPACE & DEFENSE - 1.4%
9,500 Honeywell International, Inc. (a)................................................ $ 1,081,385
--------------
AUTOMOBILES - 1.2%
30,000 General Motors Co................................................................ 938,400
--------------
BANKS - 12.9%
28,000 BB&T Corp. (a)................................................................... 1,018,360
70,000 F.N.B. Corp...................................................................... 937,300
40,000 Fifth Third Bancorp.............................................................. 754,800
43,000 JPMorgan Chase & Co. (a)......................................................... 2,806,610
9,500 M&T Bank Corp.................................................................... 1,135,250
20,000 PacWest Bancorp.................................................................. 833,600
44,000 Wells Fargo & Co. (a)............................................................ 2,231,680
--------------
9,717,600
--------------
BIOTECHNOLOGY - 2.2%
26,000 AbbVie, Inc. (a)................................................................. 1,636,180
--------------
CAPITAL MARKETS - 2.2%
27,500 Charles Schwab (The) Corp........................................................ 840,950
25,000 Invesco Ltd...................................................................... 785,000
--------------
1,625,950
--------------
CHEMICALS - 0.8%
7,500 LyondellBasell Industries N.V., Class A.......................................... 610,200
--------------
COMMERCIAL SERVICES & SUPPLIES - 1.3%
60,000 Covanta Holding Corp............................................................. 1,000,200
--------------
CONSUMER FINANCE - 1.3%
15,500 American Express Co.............................................................. 1,019,280
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 4.1%
63,200 AT&T, Inc. (a)................................................................... 2,474,280
12,700 Verizon Communications, Inc. (a)................................................. 646,430
--------------
3,120,710
--------------
ELECTRIC UTILITIES - 1.5%
30,000 PPL Corp. (a).................................................................... 1,156,200
--------------
ENERGY EQUIPMENT & SERVICES - 0.4%
33,500 Noble Corp. PLC.................................................................. 279,390
--------------
FOOD & STAPLES RETAILING - 1.5%
12,000 CVS Health Corp.................................................................. 1,157,400
--------------
FOOD PRODUCTS - 2.1%
17,500 B&G Foods, Inc................................................................... 752,325
10,000 Kraft Heinz (The) Co............................................................. 831,900
--------------
1,584,225
--------------
HEALTH CARE EQUIPMENT & SUPPLIES - 2.4%
22,300 Medtronic PLC (a)................................................................ 1,794,704
--------------
HOTELS, RESTAURANTS & LEISURE - 2.9%
14,000 DineEquity, Inc. (a)............................................................. 1,176,840
17,000 Six Flags Entertainment Corp. (a)................................................ 980,730
--------------
2,157,570
--------------
Page 6 See Notes to Financial Statements
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2016 (UNAUDITED)
SHARES DESCRIPTION VALUE
----------- --------------------------------------------------------------------------------- --------------
COMMON STOCKS (CONTINUED)
INDUSTRIAL CONGLOMERATES - 4.4%
110,000 General Electric Co. (a)......................................................... $ 3,325,300
--------------
INSURANCE - 5.0%
23,000 Arthur J. Gallagher & Co......................................................... 1,111,590
12,000 Chubb, Ltd....................................................................... 1,519,320
24,500 MetLife, Inc..................................................................... 1,115,975
--------------
3,746,885
--------------
IT SERVICES - 1.7%
15,000 Automatic Data Processing, Inc. (a).............................................. 1,317,600
--------------
MEDIA - 3.4%
30,000 Cinemark Holdings, Inc........................................................... 1,085,400
43,000 National CineMedia, Inc.......................................................... 627,800
40,000 Regal Entertainment Group, Class A (a)........................................... 841,200
--------------
2,554,400
--------------
MULTI-UTILITIES - 1.3%
11,000 DTE Energy Co. (a)............................................................... 997,480
--------------
OIL, GAS & CONSUMABLE FUELS - 8.8%
18,000 Chevron Corp. (a)................................................................ 1,818,000
20,500 ConocoPhillips (a)............................................................... 897,695
12,000 Exxon Mobil Corp................................................................. 1,068,240
10,000 Occidental Petroleum Corp. (a)................................................... 754,400
29,800 Royal Dutch Shell PLC, ADR, Class A (a).......................................... 1,445,002
13,200 TOTAL S.A., ADR (a).............................................................. 640,464
--------------
6,623,801
--------------
PHARMACEUTICALS - 8.1%
50,000 Merck & Co., Inc. (a)............................................................ 2,813,000
95,000 Pfizer, Inc. (a)................................................................. 3,296,500
--------------
6,109,500
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 3.9%
60,000 Intel Corp. (a).................................................................. 1,895,400
20,000 Microchip Technology, Inc. (a)................................................... 1,033,600
--------------
2,929,000
--------------
SOFTWARE - 2.6%
37,000 Microsoft Corp................................................................... 1,961,000
--------------
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS - 1.1%
8,600 Apple, Inc. (a).................................................................. 858,796
--------------
TOBACCO - 4.1%
27,000 Altria Group, Inc. (a)........................................................... 1,718,280
13,800 Philip Morris International, Inc. (a)............................................ 1,361,784
--------------
3,080,064
--------------
TOTAL COMMON STOCKS.............................................................. 62,383,220
(Cost $63,614,252) --------------
See Notes to Financial Statements Page 7
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2016 (UNAUDITED)
SHARES/
UNITS DESCRIPTION VALUE
----------- --------------------------------------------------------------------------------- --------------
MASTER LIMITED PARTNERSHIPS - 3.4%
CAPITAL MARKETS - 1.0%
28,500 Blackstone Group, L.P............................................................ $ 746,415
--------------
OIL, GAS & CONSUMABLE FUELS - 2.4%
26,000 Alliance Resource Partners, L.P.................................................. 380,900
16,700 Energy Transfer Partners, L.P.................................................... 605,542
19,000 Enterprise Products Partners, L.P................................................ 527,440
18,000 Golar LNG Partners, L.P.......................................................... 306,180
--------------
1,820,062
--------------
TOTAL MASTER LIMITED PARTNERSHIPS................................................ 2,566,477
(Cost $3,590,653) --------------
COMMON STOCKS - BUSINESS DEVELOPMENT COMPANIES - 1.4%
CAPITAL MARKETS - 1.4%
71,000 Ares Capital Corp............................................................. 1,053,640
(Cost $1,216,234) --------------
PRINCIPAL STATED
VALUE DESCRIPTION RATE (b) MATURITY (c) VALUE
----------- ---------------------------------------------------- ------------- ------------ --------------
SENIOR FLOATING-RATE LOAN INTERESTS - 21.1%
CAPITAL MARKETS - 0.3%
$ 194,152 American Beacon Advisors, Inc., Term Loan B......... 5.50% 03/15/22 192,211
--------------
CHEMICALS - 0.1%
98,999 Ineos US Finance LLC, 2022 Dollar Term Loan......... 4.25% 03/31/22 98,834
--------------
COMMERCIAL SERVICES & SUPPLIES - 0.8%
381,005 SMG Holdings, Inc., Term Loan B..................... 4.50% 02/27/20 374,338
195,500 WTG Holdings III Corp. (EWT Holdings III Corp.),
Term Loan (First Lien)........................... 4.75% 01/15/21 195,011
--------------
569,349
--------------
CONSUMER FINANCE - 0.3
237,292 Walter Investment Management Corp., Tranche B Term
Loan............................................. 4.75% 12/18/20 200,511
--------------
CONTAINERS & PACKAGING - 0.2%
122,548 Anchor Glass Container Corp., Term B Loan........... 4.75% 07/01/22 122,956
--------------
DIVERSIFIED CONSUMER SERVICES - 1.1%
229,381 Asurion LLC, Incremental Tranche B-1 Term Loan...... 5.00% 05/24/19 229,585
235,551 Asurion LLC, Incremental Tranche B-4 Term Loan...... 5.00% 08/04/22 234,767
352,941 Asurion LLC, Term Loan (Second Lien)................ 8.50% 03/03/21 344,647
--------------
808,999
--------------
DIVERSIFIED FINANCIAL SERVICES - 1.3%
199,000 AlixPartners LLP, Initial Term Loan................. 4.50% 07/15/22 199,547
298,431 Duff & Phelps Corp., Initial Term Loan.............. 4.75% 04/23/20 297,685
500,000 First Data Corp., 2021 New Dollar Term Loan......... 4.44% 03/24/21 502,085
--------------
999,317
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.3%
250,000 Level 3 Financing, Inc., Tranche B-II 2022 Term
Loan............................................. 3.50% 05/31/22 249,895
--------------
ELECTRONIC EQUIPMENT, INSTRUMENTS &
COMPONENTS - 0.2%
177,727 Zebra Technologies Corp., Initial Term Loan......... 4.75% 10/27/21 178,561
--------------
Page 8 See Notes to Financial Statements
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2016 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION RATE (b) MATURITY (c) VALUE
----------- ---------------------------------------------------- ------------- ------------ --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
FOOD & STAPLES RETAILING - 1.3%
$ 511,500 Albertsons LLC, Term B-4 Loan....................... 5.50% 08/25/21 $ 511,342
501,016 BJ's Wholesale Club, Inc., New 2013 (November)
Replacement Loan (First Lien).................... 4.50% 09/26/19 498,511
--------------
1,009,853
--------------
FOOD PRODUCTS - 1.4%
1,000,000 New HB Acquisition LLC, Term B Loan (Second Lien)... 8.50% 08/03/23 990,000
99,750 Pinnacle Foods Finance LLC, Tranche I Term Loan..... 3.75% 01/13/23 100,181
--------------
1,090,181
--------------
HEALTH CARE PROVIDERS & SERVICES - 1.9%
318,436 CareCore National LLC, Term Loan.................... 5.50% 03/05/21 296,145
63,499 CHS/Community Health Systems, Inc., Incremental 2021
Term H Loan...................................... 4.00% 01/27/21 62,518
247,500 Curo Health Services Holdings, Inc., Term B Loan
(First Lien)..................................... 6.50% 02/07/22 246,572
673,083 Healogics, Inc. (CDRH Parent, Inc.), Initial Term
Loan (First Lien)................................ 5.25% 07/01/21 615,871
224,438 U.S. Renal Care, Inc., Term Loan B.................. 5.25% 12/30/22 222,474
--------------
1,443,580
--------------
HOTELS, RESTAURANTS & LEISURE - 5.2%
738,792 Amaya Holdings B.V., Initial Term B Loan
(First Lien)..................................... 5.00% 08/01/21 715,092
638,625 Caesars Growth Partners LLC, Term B Loan
(First Lien)..................................... 6.25% 05/08/21 597,114
370,125 CityCenter Holdings LLC, Term B Loan................ 4.25% 10/16/20 371,050
390,181 Focus Brands, Inc., Refinancing Term Loan
(First Lien)..................................... 4.25% 02/21/18 389,857
493,750 Norwegian Cruise Lines (NCL Corp.), Term B Loan..... 4.00% 11/19/21 493,340
320,154 Planet Fitness Holdings LLC, Term Loan.............. 4.50% 03/31/21 320,955
640,250 Portillo's Holdings LLC, Term B Loan (First Lien)... 4.75% 08/02/21 632,247
211,071 Red Lobster Management LLC, Initial Term Loan
(First Lien)..................................... 6.25% 07/28/21 211,599
231,230 ROC Finance LLC, Funded Term B Loan................. 5.00% 06/20/19 221,114
--------------
3,952,368
--------------
INSURANCE - 0.7%
98,884 Amwins Group LLC, Term Loan B....................... 4.75% 09/06/19 99,234
244,290 Confie Seguros Holding II Co., Term B Loan
(First Lien)..................................... 5.75% 11/09/18 240,828
219,375 USI, Inc. (Compass Investors, Inc.), Initial Term
Loan............................................. 4.25% 12/27/19 218,142
--------------
558,204
--------------
IT SERVICES - 0.2%
131,118 Sungard Availability Services Capital, Inc., Term
Loan B........................................... 6.00% 03/29/19 117,295
--------------
LIFE SCIENCES TOOLS & SERVICES - 0.9%
426,750 InVentiv Health, Inc., Term B-4 Loan................ 7.75% 05/15/18 426,750
286,081 Pharmaceutical Product Development, Inc., Initial
Term Loan........................................ 4.25% 08/18/22 286,319
--------------
713,069
--------------
MACHINERY - 0.4%
296,250 Douglas Dynamics LLC, Term Loan B................... 5.25% 12/02/21 296,991
--------------
MEDIA - 0.9%
217,332 Formula One (Delta 2 Lux S.A.R.L.),
Facility B3 (USD)................................ 4.75% 07/30/21 214,107
181,188 Media General, Inc., Term Loan B.................... 4.00% 07/31/20 181,278
244,665 WME IMG Worldwide, Inc., Term Loan (First Lien)..... 5.25% 05/06/21 245,353
--------------
640,738
--------------
See Notes to Financial Statements Page 9
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2016 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION RATE (b) MATURITY (c) VALUE
----------- ---------------------------------------------------- ------------- ------------ --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
PHARMACEUTICALS - 0.8%
$ 319,350 Akorn, Inc., Loan................................... 5.25% 04/16/21 $ 320,946
194,348 Patheon, Inc. (JLL/Delta Dutch Newco B.V.),
Initial Dollar Term Loan......................... 4.25% 03/11/21 191,069
97,665 Valeant Pharmaceuticals International, Inc.,
Series F-1 Tranche B Term Loan................... 5.00% 04/01/22 96,377
--------------
608,392
--------------
PROFESSIONAL SERVICES - 0.9%
123,744 Advantage Sales & Marketing, Inc., Initial Term Loan
(First Lien)..................................... 4.25% 07/23/21 123,203
201,215 Information Resources, Inc., Term Loan.............. 4.75% 09/30/20 201,342
343,000 TransUnion LLC, 2015 Term B-2 Loan.................. 3.50% 04/09/21 342,904
--------------
667,449
--------------
SOFTWARE - 0.7%
99,500 Blue Coat Systems, Inc., Initial Term Loan.......... 4.50% 05/20/22 99,096
471,389 BMC Software Finance, Inc., Initial US Term Loan.... 5.00% 09/10/20 421,893
--------------
520,989
--------------
SPECIALTY RETAIL - 0.9%
340,770 Neiman Marcus Group, Inc., The, Other Term Loan..... 4.25% 10/25/20 312,087
222,369 PetSmart, Inc., Tranche B-1 Loan.................... 4.25% 03/11/22 222,369
169,924 Serta Simmons Holdings LLC, Term Loan B............. 4.25% 10/01/19 170,164
--------------
704,620
--------------
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS - 0.3%
201,154 Dell, Inc., Term B-2 Loan........................... 4.00% 04/29/20 201,191
--------------
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS........................................ 15,945,553
(Cost $16,250,813) --------------
STATED STATED
SHARES DESCRIPTION RATE MATURITY VALUE
----------- ---------------------------------------------------- ------------- ------------ --------------
$25 PAR PREFERRED SECURITIES - 4.3%
BANKS - 1.1%
31,500 PNC Financial Services Group, Inc., Series Q........ 5.38% (d) 809,550
--------------
CAPITAL MARKETS - 1.0%
29,300 Goldman Sachs Group, Inc............................ 5.95% (d) 758,870
--------------
CONSUMER FINANCE - 1.5%
42,800 Discover Financial Services, Series B............... 6.50% (d) 1,131,632
--------------
MARINE - 0.7%
20,000 Seaspan Corp., Series D............................. 7.95% (d) 505,000
--------------
TOTAL $25 PAR PREFERRED SECURITIES............................................... 3,205,052
(Cost $3,025,883) --------------
$100 PAR PREFERRED SECURITIES - 1.0%
DIVERSIFIED TELECOMMUNICATION SERVICES - 1.0%
7,500 Frontier Communications Corp., Series A............. 11.13% 06/29/18 738,150
(Cost $751,518) --------------
Page 10 See Notes to Financial Statements
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2016 (UNAUDITED)
SHARES DESCRIPTION VALUE
----------- --------------------------------------------------------------------------------- --------------
INVESTMENT COMPANIES - 1.8%
CAPITAL MARKETS - 1.1%
4,000 SPDR S&P 500 ETF Trust........................................................... $ 840,320
--------------
OIL, GAS & CONSUMABLE FUELS - 0.7%
27,800 Kayne Anderson MLP Investment Co................................................. 530,424
--------------
TOTAL INVESTMENT COMPANIES....................................................... 1,370,744
(Cost $1,823,609) --------------
REAL ESTATE INVESTMENT TRUSTS - 4.5%
25,000 Blackstone Mortgage Trust, Inc., Class A......................................... 704,750
10,000 Crown Castle International Corp.................................................. 908,100
20,000 Hospitality Properties Trust..................................................... 512,000
20,000 Lamar Advertising Co., Class A................................................... 1,301,000
--------------
TOTAL REAL ESTATE INVESTMENT TRUSTS.............................................. 3,425,850
(Cost $3,154,064) --------------
TOTAL INVESTMENTS - 120.1%....................................................... 90,688,686
(Cost $93,427,026) (e) --------------
NUMBER OF
CONTRACTS DESCRIPTION VALUE
----------- --------------------------------------------------------------------------------- --------------
CALL OPTIONS WRITTEN - (0.4%)
Altria Group, Inc. Call
150 @ $65.00 due June 2016........................................................... (3,000)
--------------
Apple, Inc. Call
25 @ 100.00 due June 2016........................................................... (4,000)
--------------
Energy Transfer Partners L.P. Call
75 @ 37.50 due June 2016........................................................... (4,875)
--------------
Honeywell International, Inc. Call
50 @ 115.00 due June 2016.......................................................... (4,950)
--------------
JPMorgan Chase & Co. Call
125 @ 65.00 due June 2016........................................................... (15,375)
--------------
Lamar Advertising Co. Call
100 @ $65.00 due June 2016........................................................... (8,000)
--------------
Medtronic PLC Call
150 @ 85.00 due June 2016........................................................... (600)
--------------
Microchip Technology, Inc. Call
75 @ 50.00 due June 2016........................................................... (42,975)
--------------
Occidental Petroleum Corp. Call
25 @ 77.50 due June 2016........................................................... (900)
--------------
Philip Morris International, Inc. Call
75 @ 105.00 due June 2016.......................................................... (225)
--------------
Six Flags Entertainment Corp. Call
75 @ 60.00 due June 2016........................................................... (2,100)
--------------
S&P 500 Index Calls (f)
65 @ 2,100.00 due June 2016........................................................ (105,170)
65 @ 2,115.00 due June 2016........................................................ (62,400)
50 @ 2,130.00 due June 2016........................................................ (23,500)
--------------
(191,070)
--------------
See Notes to Financial Statements Page 11
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2016 (UNAUDITED)
DESCRIPTION VALUE
--------------------------------------------------------------------------------- --------------
TOTAL CALL OPTIONS WRITTEN....................................................... $ (278,070)
(Premiums received $150,872) --------------
OUTSTANDING LOAN - (23.3%)....................................................... (17,600,000)
NET OTHER ASSETS AND LIABILITIES - 3.6%.......................................... 2,678,369
--------------
NET ASSETS - 100.0%.............................................................. $ 75,488,985
==============
-----------------------------
(a) All or a portion of this security serves as collateral on the outstanding
loan and call options written.
(b) Senior Floating-Rate Loan Interests ("Senior Loans") in which the Fund
invests pay interest at rates which are periodically predetermined by
reference to a base lending rate plus a premium. These base lending rates
are generally (i) the lending rate offered by one or more major European
banks, such as the London Inter-Bank Offered Rate ("LIBOR"), (ii) the
prime rate offered by one or more United States banks or (iii) the
certificate of deposit rate. Certain Senior Loans are subject to a LIBOR
floor that establishes a minimum LIBOR rate. The interest rate shown
reflects the rate in effect at May 31, 2016. When a range of rates is
disclosed, the Fund holds more than one contract within the same tranche
at varying rates.
(c) Senior Loans generally are subject to mandatory and/or optional
prepayment. As a result, the actual remaining maturity of Senior Loans may
be substantially less than the stated maturities shown.
(d) Perpetual maturity.
(e) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of May 31, 2016, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $3,899,579 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $6,637,919.
(f) Call options on securities indices were written on a portion of the common
stock positions that were not used to cover call options written on
individual equity securities held in the Fund's portfolio.
ADR American Depositary Receipt
Page 12 See Notes to Financial Statements
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2016 (UNAUDITED)
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of May 31, 2016
is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
5/31/2016 PRICES INPUTS INPUTS
-------------- -------------- -------------- --------------
Common Stocks*..................................... $ 62,383,220 $ 62,383,220 $ -- $ --
Master Limited Partnerships*....................... 2,566,477 2,566,477 -- --
Common Stocks - Business Development
Companies*...................................... 1,053,640 1,053,640 -- --
Senior Floating-Rate Loan Interests*............... 15,945,553 -- 15,945,553 --
$25 Par Preferred Securities*...................... 3,205,052 3,205,052 -- --
$100 Par Preferred Securities*..................... 738,150 738,150 -- --
Investment Companies*.............................. 1,370,744 1,370,744 -- --
Real Estate Investment Trusts...................... 3,425,850 3,425,850 -- --
-------------- -------------- -------------- --------------
Total Investments.................................. $ 90,688,686 $ 74,743,133 $ 15,945,553 $ --
============== ============== ============== ==============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
5/31/2016 PRICES INPUTS INPUTS
-------------- -------------- -------------- --------------
Call Options Written............................... $ (278,070) $ (278,070) $ -- $ --
============== ============== ============== ==============
* See Portfolio of Investments for Industry Breakout.
All transfers in and out of the Levels are assumed to be transferred on the last
day of the period at their current value. There were no transfers between Levels
at May 31, 2016.
See Notes to Financial Statements Page 13
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2016 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $93,427,026)........................................................................... $ 90,688,686
Cash............................................................................................ 1,473,320
Receivables:
Investment securities sold................................................................... 1,092,799
Dividends.................................................................................... 225,894
Interest..................................................................................... 148,530
Dividend reclaims............................................................................ 440
Prepaid expenses................................................................................ 18,957
--------------
Total Assets................................................................................. 93,648,626
--------------
LIABILITIES:
Outstanding loan................................................................................ 17,600,000
Options written, at value (Premiums received $150,872).......................................... 278,070
Payables:
Investment securities purchased.............................................................. 126,635
Investment advisory fees..................................................................... 78,007
Audit and tax fees........................................................................... 30,060
Administrative fees.......................................................................... 12,668
Unfunded loan commitments.................................................................... 9,574
Interest and fees on loan.................................................................... 6,518
Printing fees................................................................................ 5,518
Transfer agent fees.......................................................................... 4,905
Trustees' fees and expenses.................................................................. 3,082
Custodian fees............................................................................... 3,075
Financial reporting fees..................................................................... 771
Other liabilities............................................................................... 758
--------------
Total Liabilities............................................................................ 18,159,641
--------------
NET ASSETS...................................................................................... $ 75,488,985
==============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................. $ 135,726,740
Par value....................................................................................... 82,595
Accumulated net investment income (loss)........................................................ (1,650,282)
Accumulated net realized gain (loss) on investments and written options......................... (55,804,530)
Net unrealized appreciation (depreciation) on investments and written options................... (2,865,538)
--------------
NET ASSETS...................................................................................... $ 75,488,985
==============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)............................ $ 9.14
==============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized)..... 8,259,517
==============
Page 14 See Notes to Financial Statements
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 2016 (UNAUDITED)
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $13,763)........................................... $ 1,436,256
Interest........................................................................................ 512,958
--------------
Total investment income...................................................................... 1,949,214
--------------
EXPENSES:
Investment advisory fees........................................................................ 459,216
Interest and fees on loan....................................................................... 104,152
Administrative fees............................................................................. 53,067
Audit and tax fees.............................................................................. 26,750
Printing fees................................................................................... 18,726
Transfer agent fees............................................................................. 12,505
Trustees' fees and expenses..................................................................... 8,933
Custodian fees.................................................................................. 6,146
Financial reporting fees........................................................................ 4,625
Legal fees...................................................................................... 1,848
Other........................................................................................... 28,637
--------------
Total expenses............................................................................... 724,605
--------------
NET INVESTMENT INCOME (LOSS).................................................................... 1,224,609
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments.................................................................................. (1,330,579)
Written options.............................................................................. 247,079
--------------
Net realized gain (loss)........................................................................ (1,083,500)
--------------
Net change in unrealized appreciation (depreciation) on:
Investments.................................................................................. 1,566,748
Written options.............................................................................. (228,191)
--------------
Net change in unrealized appreciation (depreciation)............................................ 1,338,557
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)......................................................... 255,057
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 1,479,666
==============
See Notes to Financial Statements Page 15
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE
SIX MONTHS FOR THE
ENDED YEAR
5/31/2016 ENDED
(UNAUDITED) 11/30/2015
------------ ------------
OPERATIONS:
Net investment income (loss)......................................................... $ 1,224,609 $ 2,607,351
Net realized gain (loss)............................................................. (1,083,500) 1,472,240
Net change in unrealized appreciation (depreciation)................................. 1,338,557 (5,843,655)
------------ ------------
Net increase (decrease) in net assets resulting from operations...................... 1,479,666 (1,764,064)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................................................ (2,808,236) (4,292,340)
Return of capital.................................................................... -- (1,324,132)
------------ ------------
Total distributions to shareholders.................................................. (2,808,236) (5,616,472)
------------ ------------
Total increase (decrease) in net assets.............................................. (1,328,570) (7,380,536)
NET ASSETS:
Beginning of period.................................................................. 76,817,555 84,198,091
------------ ------------
End of period........................................................................ $ 75,488,985 $ 76,817,555
============ ============
Accumulated net investment income (loss) at end of period............................ $ (1,650,282) $ (66,655)
============ ============
COMMON SHARES:
Common Shares at end of period....................................................... 8,259,517 8,259,517
============ ============
Page 16 See Notes to Financial Statements
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MAY 31, 2016 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations.................... $ 1,479,666
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Purchases of investments...................................................... (5,495,812)
Sales, maturities and paydowns of investments................................. 10,169,859
Proceeds from written options................................................. 1,933,794
Amount paid to close written options.......................................... (1,759,957)
Return of capital and realized gain distributions received from investments 106,782
Net amortization/accretion of premiums/discounts on investments............... 7,918
Net realized gain/loss on investments and written options..................... 1,083,500
Net change in unrealized appreciation/depreciation on investments
and written options........................................................ (1,338,557)
CHANGES IN ASSETS AND LIABILITIES:
Decrease in interest receivable............................................... 11,371
Decrease in dividends receivable.............................................. 8,114
Increase in prepaid expenses.................................................. (14,881)
Increase in interest and fees on loan payable................................. 1,303
Decrease in investment advisory fees payable.................................. (1,908)
Decrease in audit and tax fees payable........................................ (23,440)
Decrease in legal fees payable................................................ (1,065)
Decrease in printing fees payable............................................. (8,886)
Decrease in administrative fees payable....................................... (4,684)
Increase in custodian fees payable............................................ 935
Increase in transfer agent fees payable....................................... 2,714
Increase in Trustees' fees and expenses payable............................... 271
Increase in other liabilities................................................. 758
------------
CASH PROVIDED BY OPERATING ACTIVITIES.............................................. $ 6,157,795
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net investment income............... (2,808,236)
Repayment of borrowing........................................................ (3,200,000)
------------
CASH USED IN FINANCING ACTIVITIES.................................................. (6,008,236)
------------
Increase in cash................................................................... 149,559
Cash at beginning of period........................................................ 1,323,761
------------
Cash at end of period.............................................................. $ 1,473,320
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees.................................. $ 102,849
============
See Notes to Financial Statements Page 17
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
5/31/2016 ------------------------------------------------------------------------
(UNAUDITED) 2015 2014 (a) 2013 (b) 2012 2011
------------ ------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period.... $ 9.30 $ 10.19 $ 9.73 $ 8.63 $ 9.20 $ 9.93
---------- ---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)............ 0.15 0.32 0.32 0.20 0.51 0.84 (c)
Net realized and unrealized gain
(loss)............................... 0.03 (0.53) 0.80 1.53 (0.36) (0.56)
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations........ 0.18 (0.21) 1.12 1.73 0.15 0.28
---------- ---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income................... (0.34) (0.52) (0.66) (0.33) (0.51) (0.78)
Return of capital....................... -- (0.16) -- (0.30) (0.21) (0.24)
---------- ---------- ---------- ---------- ---------- ----------
Total distributions to Common
Shareholders......................... (0.34) (0.68) (0.66) (0.63) (0.72) (1.02)
---------- ---------- ---------- ---------- ---------- ----------
Premiums from shares sold in Common
Share offering....................... -- -- -- -- -- 0.01
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period.......... $ 9.14 $ 9.30 $ 10.19 $ 9.73 $ 8.63 $ 9.20
========== ========== ========== ========== ========== ==========
Market value, end of period............. $ 8.90 $ 8.17 $ 9.19 $ 8.55 $ 7.69 $ 8.41
========== ========== ========== ========== ========== ==========
TOTAL RETURN BASED ON NET ASSET
VALUE (d)............................ 2.39% (1.23)% 12.81% (e) 21.52% 2.24% (f) 2.81%
========== ========== ========== ========== ========== ==========
TOTAL RETURN BASED ON MARKET
VALUE (d)............................ 13.49% (3.79)% 15.78% 19.84% (0.34)% (10.96)%
========== ========== ========== ========== ========== ==========
-----------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's).... $ 75,489 $ 76,818 $ 84,198 $ 80,396 $ 71,261 $ 75,980
Ratio of total expenses to average net
assets............................... 1.99% (g) 1.90% 1.91% 1.52% 1.48% 1.60%
Ratio of total expenses to average net
assets...............................
excluding interest expense........... 1.70% (g) 1.65% 1.67% 1.50% 1.48% 1.60%
Ratio of net investment income (loss) to
average net assets................... 3.36% (g) 3.24% 3.17% 2.18% 5.60% 8.42%
Portfolio turnover rate................. 5% 54% 112% 184% 790% 1,297%
INDEBTEDNESS:
Total loan outstanding (in 000's)....... $ 17,600 $ 20,800 $ 23,500 $ 18,000 $ N/A $ N/A
Asset coverage per $1,000 of
indebtedness (h)..................... $ 5,289 $ 4,693 $ 4,583 $ 5,466 $ N/A $ N/A
-----------------------------
(a) On February 21, 2014, the Fund's Board of Trustees approved an interim and
a new sub-advisory agreement with Chartwell Investment Partners, Inc.,
which became the Fund's sub-advisor on March 5, 2014, under an interim
sub-advisory agreement. On July 2, 2014, the shareholders voted to approve
the new sub-advisory agreement.
(b) On June 9, 2013, the Fund's Board of Trustees approved an interim and new
sub-advisory agreement with Chartwell Investment Partners, L.P., which
became the Fund's sub-advisor on July 1, 2013, under the interim
sub-advisory agreement. On September 16, 2013, the shareholders voted to
approve the new sub-advisory agreement.
(c) Based on average shares outstanding.
(d) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per share
for net asset value returns and changes in Common Share Price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods less than one year. Past performance is not
indicative of future results.
(e) The Fund received a payment from the sub-advisor in the amount of $3,729.
The payment from the sub-advisor represent less than $0.01 per share and
had no effect on the Fund's total return.
(f) The Fund received a payment from the former sub-advisor in the amount of
$12,651. The payment from the former sub-advisor represents less than
$0.01 per share and had no effect on the Fund's total return.
(g) Annualized.
(h) Calculated by taking the Fund's total assets less the Fund's liabilities
(not including the loan outstanding), and dividing by the outstanding loan
balance in 000's.
Page 18 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
MAY 31, 2016 (UNAUDITED)
1. ORGANIZATION
First Trust Dividend and Income Fund (the "Fund") is a diversified, closed-end
management investment company organized as a Massachusetts business trust on
June 14, 2007 and is registered with the Securities and Exchange Commission
under the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund
trades under the ticker symbol FAV on the New York Stock Exchange ("NYSE").
The Fund's primary investment objective is to seek a high level of current
income. It has a secondary objective of capital appreciation. The Fund seeks to
achieve its objectives by investing at least 80% of its Managed Assets (as
defined below) in a diversified portfolio of dividend paying, multi-cap equity
securities, that Chartwell Investment Partners, LLC ("Sub-Advisor" or
"Chartwell") believes offer the potential for attractive income and/or capital
appreciation, and debt securities and senior, secured floating rate loans
("Senior Loans")(1) that First Trust Advisors L.P. ("First Trust" or the
"Advisor") believes offer the potential for attractive income and/or capital
appreciation. The Fund's portfolio consists of two components: (1) the "Equity
Component," which consists primarily of equity securities of both U.S. and
non-U.S. issuers of any market capitalization that are readily traded on a
registered U.S. national securities exchange ("Equity Securities"); and (2) the
"Senior Loan/High Yield Debt Component." Chartwell manages the Equity Component
of the Fund's portfolio and First Trust manages the Senior Loan/High Yield Debt
Component of the Fund's portfolio. The Equity Securities in which the Fund may
invest will include common stocks, preferred securities, convertible securities,
American Depositary Receipts, including American Depositary Shares, European
Depositary Receipts, Global Depositary Receipts and warrants, all of which will
generally trade on a registered U.S. national securities exchange. In addition,
Equity Securities will also include (including for purposes of the 80% test set
forth above) investments in Real Estate Investment Trusts ("REITs"), Master
Limited Partnerships ("MLPs") and investment companies, including
exchange-traded funds and business development companies. The Senior Loan/High
Yield Debt Component will primarily consist of (i) Senior Loans and (ii) debt
securities that are rated below investment grade (i.e., "junk bonds") or unrated
at the time of purchase and deemed to be of comparable credit quality. The Fund
may invest up to 25% of its Managed Assets in U.S. dollar-denominated Equity
Securities of non-U.S. issuers. On an ongoing and consistent basis, the Fund
expects to write (sell) covered call options on equity indices and/or Equity
Securities with strike prices and expiration dates that are collectively
intended to provide risk/reward characteristics that are consistent with the
Fund's investment objectives. Managed Assets are defined as the total asset
value of the Fund minus the sum of the Fund's liabilities other than the
principal amount of borrowings. There can be no assurance that the Fund's
investment objectives will be achieved. The Fund may not be appropriate for all
investors.
On March 18, 2016, First Trust announced that the Fund's Board of Trustees
approved the merger of the Fund into First Trust High Income ETF (Nasdaq: FTHI),
an actively managed exchange-traded fund ("ETF") managed by First Trust, and a
series of First Trust Exchange-Traded Fund VI (the "Trust"). FTHI will be the
surviving fund. Under the terms of the proposed transaction, which is expected
to be tax-free, the Fund's assets would be transferred to, and the Fund's
liabilities would be assumed by, FTHI, and the Fund's shareholders would receive
shares of FTHI with a value equal to the aggregate net asset value of the Fund's
shares held by them. It is currently expected that the transaction will be
consummated no later than October 31, 2016, subject to requisite shareholder
approvals, satisfaction of applicable regulatory requirements and approvals, and
customary closing conditions. There is no assurance when or whether such
approvals, or any other approvals required for the transaction, will be
obtained.
On September 15, 2015, the Fund commenced a Share Repurchase Program. On March
15, 2016, the Share Repurchase Program expired.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund, which is an investment company within the scope of Financial
Accounting Standards Board ("FASB") Accounting Standards Update 2013-08, follows
accounting and reporting guidance under FASB Accounting Standards Codification
Topic 946, "Financial Services-Investment Companies." The following is a summary
of significant accounting policies consistently followed by the Fund in the
preparation of its financial statements. The preparation of financial statements
in accordance with accounting principles generally accepted in the United States
of America ("U.S. GAAP") requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of the Fund is determined daily
as of the close of regular trading on the NYSE, normally 4:00 p.m. Eastern time,
on each day the NYSE is open for trading. If the NYSE closes early on a
valuation day, the NAV is determined as of that time. Domestic debt securities
and foreign securities are priced using data reflecting the earlier closing of
the principal markets for those securities. The Fund's NAV per Common Share is
calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
dividends declared but unpaid, and any borrowings of the Fund) by the total
number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e. a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Fund's
-----------------------------
(1) The terms "security" and "securities" used throughout the Notes to
Financial Statements include Senior Loans.
Page 19
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
MAY 31, 2016 (UNAUDITED)
investment advisor, First Trust, in accordance with valuation procedures adopted
by the Fund's Board of Trustees, and in accordance with provisions of the 1940
Act. Investments valued by the Advisor's Pricing Committee, if any, are
footnoted as such in the footnotes to the Portfolio of Investments. The Fund's
investments are valued as follows:
Common stocks, MLPs and other securities listed on any national or foreign
exchange (excluding The Nasdaq Stock Market LLC ("Nasdaq") and the London
Stock Exchange Alternative Investment Market ("AIM")) are valued at the
last sale price on the exchange on which they are principally traded or,
for Nasdaq and AIM securities, the official closing price. Securities
traded on more than one securities exchange are valued at the last sale
price or official closing price, as applicable, at the close of the
securities exchange representing the principal market for such securities.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Exchange-traded options contracts are valued at the closing price in the
market where such contracts are principally traded. If no closing price is
available, exchange-traded options contracts are fair valued at the mean
of their most recent bid and asked price, if available, and otherwise at
their closing bid price. Over-the-counter options contracts are fair
valued at the mean of their most recent bid and asked price, if available,
and otherwise at their closing bid price.
Fixed income and other debt securities having a remaining maturity of 60
days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer-specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes thereto;
2) the liquidity conditions in the relevant market and changes thereto;
3) the interest rate conditions in the relevant market and changes
thereto (such as significant changes in interest rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing Committee
may use last-obtained market-based data to assist it when valuing
portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted Securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's fair value. As a general
principle, the current fair value of a security would appear to be the amount
which the Fund might reasonably expect to receive for the security upon its
current sale. When fair value prices are used, generally they will differ from
market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
If the securities in question are foreign securities, the following additional
information may be considered:
1) the value of similar foreign securities traded on other foreign
markets;
2) ADR trading of similar securities;
3) closed-end fund trading of similar securities;
4) foreign currency exchange activity;
5) the trading prices of financial products that are tied to baskets of
foreign securities;
6) factors relating to the event that precipitated the pricing problem;
7) whether the event is likely to recur; and
8) whether the effects of the event are isolated or whether they affect
entire markets, countries or regions.
Page 20
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
MAY 31, 2016 (UNAUDITED)
Foreign securities traded outside the United States are generally valued as of
the time their trading is complete, which is usually different from the close of
the NYSE. Occasionally, events affecting the value of such securities may occur
between such times and the close of the NYSE that will not always be reflected
in the computation of the value of such securities. If events affecting the
value of such securities occur during such period, these securities will be
valued at their fair value according to procedures adopted by the Fund's Board
of Trustees (see above). For certain foreign equity securities, a third-party
pricing service may be utilized to determine fair value. All securities and
other assets of the Fund initially expressed in foreign currencies will be
converted to U.S. dollars using exchange rates in effect at the time of
valuation.
The Senior Loans in which the Fund invests are not listed on any securities
exchange or board of trade. Senior Loans are typically bought and sold by
institutional investors in individually negotiated private transactions that
function in many respects like an over-the-counter secondary market, although
typically no formal market-makers exist. This market, while having grown
substantially since its inception, generally has fewer trades and less liquidity
than the secondary market for other types of securities. Some Senior Loans have
few or no trades, or trade infrequently, and information regarding a specific
Senior Loan may not be widely available or may be incomplete. Accordingly,
determinations of the value of Senior Loans may be based on infrequent and dated
information. Because there is less reliable, objective data available, elements
of judgment may play a greater role in valuation of Senior Loans than for other
types of securities. Typically, Senior Loans are fair valued using information
provided by a third-party pricing service. The third-party pricing service
primarily uses over-the-counter pricing from dealer runs and broker quotes from
indicative sheets to value the Senior Loans. If the pricing service cannot or
does not provide a value according to procedures adopted by the Fund's Board of
Trustees, and in accordance with the provisions of the 1940 Act. Fair valuation
of a Senior Loan is based on the consideration of all available information,
including, but not limited to the following:
1) the fundamental business data relating to the issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of the security;
4) the financial statements of the issuer;
5) the credit quality and cash flow of the issuer, based on the
Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management
11) the prospects for the issuer's industry, and multiples (of earnings
and/or cash flows) being paid for similar businesses in that
industry;
12) issuer's competitive position within the industry;
13) issuer's ability to access additional liquidity through public
and/or private markets; and
14) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of May 31, 2016, is
included with the Fund's Portfolio of Investments.
Page 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
MAY 31, 2016 (UNAUDITED)
B. OPTION CONTRACTS
The goal of the option overlay strategy is to generate additional income from
option premiums in an attempt to enhance the distributions payable to
shareholders and reduce overall portfolio volatility. The Fund generally will
write "at-the-money" or "out-of-the-money" call options on stock indices and
single stocks. The option strategy is managed by Chartwell. The Fund will not
write (sell) "naked" or uncovered options. When the Fund writes (sells) an
option, an amount equal to the premium received by the Fund is included in
"Options written, at value" on the Statement of Assets and Liabilities. Options
are marked-to-market daily and their value will be affected by changes in the
value and dividend rates of the underlying equity securities, changes in
interest rates, changes in the actual or perceived volatility of the securities
markets and the underlying equity securities and the remaining time to the
options' expiration. The value of options may also be adversely affected if the
market for the options becomes less liquid or trading volume diminishes.
Options the Fund writes (sells) will either be exercised, expire or be cancelled
pursuant to a closing transaction. If the price of the underlying equity
security exceeds the option's exercise price, it is likely that the option
holder will exercise the option. If a single stock option written (sold) by the
Fund is exercised, the Fund would be obligated to deliver the underlying equity
security to the option holder upon payment of the strike price. In this case,
the option premium received by the Fund will be added to the amount realized on
the sale of the underlying security for purposes of determining gain or loss.
Index options, if exercised, are settled in cash and therefore the Fund never
has to deliver any physical securities. If the price of the underlying equity
security is less than the option's strike price, the option will likely expire
without being exercised. The option premium received by the Fund will, in this
case, be treated as short-term capital gain on the expiration date of the
option. The Fund may also elect to close out its position in an option prior to
its expiration by purchasing an option of the same series as the option written
(sold) by the Fund. Gain or loss on options is presented separately as "Net
realized gain (loss) on written options" on the Statement of Operations.
Single stock options that the Fund writes (sells) give the option holder the
right, but not the obligation, to purchase a security from the Fund at the
strike price on or prior to the option's expiration date. The purchaser of an
index option written by the Fund has the right to any appreciation in the cash
value of the index over the strike price on the expiration date. The ability to
successfully implement the writing (selling) of covered call options depends on
the ability of the Sub-Advisor to predict pertinent market movements, which
cannot be assured. Thus, the use of options may require the Fund to sell
portfolio securities at inopportune times or for prices other than current
market value, which may limit the amount of appreciation the Fund can realize on
an investment, or may cause the Fund to hold a security that it might otherwise
sell. As the writer (seller) of a covered option, the Fund foregoes, during the
option's life, the opportunity to profit from increases in the market value of
the security covering the option above the sum of the premium and the strike
price of the option, but has retained the risk of loss should the price of the
underlying security decline. The writer (seller) of an option has no control
over the time when it may be required to fulfill its obligation as a writer
(seller) of the option. Once an option writer (seller) has received an exercise
notice, it cannot effect a closing purchase transaction in order to terminate
its obligation under the option and must deliver the underlying security to the
option holder at the exercise price.
Over-the-counter options have the risk of the potential inability of
counterparties to meet the terms of their contracts. The Fund's maximum equity
price risk for purchased options is limited to the premium initially paid. In
addition, certain risks may arise upon entering into option contracts including
the risk that an illiquid secondary market will limit the Fund's ability to
close out an option contract prior to the expiration date and that a change in
the value of the option contract may not correlate exactly with changes in the
value of the securities hedged.
C. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
daily on the accrual basis. Market premium and discounts are amortized over the
expected life of each respective borrowing.
The Fund may hold the securities of REITs. Distributions from such investments
may be comprised of return of capital, capital gains and income. The actual
character of amounts received during the year is not known until after the
REIT's fiscal year end. The Fund records the character of distributions received
from REITs during the year based on estimates available. The characterization of
distributions received by the Fund may be subsequently revised based on
information received from the REITs after their tax reporting periods conclude.
For the six months ended May 31, 2016, distributions of $106,782 received from
investments have been reclassified as return of capital and realized gain. The
cost basis of applicable investments has been reduced accordingly.
D. UNFUNDED LOAN COMMITMENTS
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrower's discretion. The Fund did not have any unfunded delayed draw loan
commitments as of May 31, 2016.
Page 22
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
MAY 31, 2016 (UNAUDITED)
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Level dividend distributions are declared and paid quarterly or as the Board of
Trustees may determine from time to time. If, for any quarterly distribution,
net investment company taxable income, if any (which term includes net
short-term capital gain), as determined as of the close of the Fund's taxable
year, is less than the amount of the distribution, the difference will generally
be a tax-free return of capital distributed from the Fund's assets.
Distributions of any net long-term capital gains earned by the Fund are
distributed at least annually. Distributions will automatically be reinvested
into additional Common Shares pursuant to the Fund's Dividend Reinvestment Plan
unless cash distributions are elected by the shareholder.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by the Fund and have no impact on net assets or NAV per share.
Temporary differences, which arise from recognizing certain items of income,
expense and gain/loss in different periods for financial statement and tax
purposes, will reverse at some point in the future.
The tax character of distributions paid during the fiscal year ended November
30, 2015 was as follows:
Distributions paid from:
Ordinary income................................... $ 4,292,340
Capital gain...................................... --
Return of capital................................. 1,324,132
As of November 30, 2015 the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income..................... $ --
Undistributed capital gains....................... --
--------------
Total undistributed earnings...................... --
Accumulated capital and other losses.............. (54,491,015)
Net unrealized appreciation (depreciation)........ (4,338,903)
--------------
Total accumulated earnings (losses)............... (58,829,918)
Other............................................. (161,862)
Paid-in capital................................... 135,809,335
--------------
Net assets........................................ $ 76,817,555
==============
F. INCOME TAXES
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal and state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
Under the Regulated Investment Company Modernization Act of 2010 (the "Act"),
net capital losses arising in taxable years after December 22, 2010, may be
carried forward indefinitely, and their character is retained as short-term
and/or long-term losses. Previously, net capital losses were carried forward for
up to eight years and treated as short-term losses. As a transition rule, the
Act requires that post-enactment net capital losses be used before pre-enactment
net capital losses. During the taxable year ended November 30, 2015, the Fund
utilized pre-enactment capital loss carryforwards in the amount of $1,895,683
for federal income tax purposes. At November 30, 2015, the Fund had
pre-enactment capital losses for federal income tax purposes of $54,491,015
expiring as follows and no non-expiring net capital losses:
EXPIRATION DATE AMOUNT
November 30, 2016 $30,255,638
November 30, 2017 17,263,318
November 30, 2018 5,877,626
November 30, 2019 1,094,433
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 2012, 2013,
2014 and 2015 remain open to federal and state audit. As of May 31, 2016,
management has evaluated the application of these standards to the Fund and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
Page 23
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
MAY 31, 2016 (UNAUDITED)
G. EXPENSES
The Fund will pay all expenses directly related to its operations.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 1.00% of the Fund's Managed Assets. First Trust
also provides fund reporting services to the Fund for a flat annual fee in the
amount of $9,250.
Chartwell serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a monthly
sub-advisory fee calculated at an annual rate of 0.50% of the Fund's Managed
Assets allocated to the Sub-Advisor that is paid by First Trust out of its
investment advisory fee.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
administrator, fund accountant and transfer agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS is responsible for
providing certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records. As transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets. BNYM IS and BNYM are subsidiaries of The Bank of New York Mellon
Corporation, a financial holding company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. Prior to January 1, 2016, the fixed annual retainer was allocated pro
rata based on each fund's net assets. Each Independent Trustee is also paid an
annual per fund fee that varies based on whether the fund is a closed-end or
other actively managed fund, or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Independent Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and Committee
Chairmen rotate every three years. The officers and "Interested" Trustee receive
no compensation from the Fund for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, other than U.S.
government obligations and short-term obligations, for the six months ended May
31, 2016 were $5,375,517 and $10,682,503, respectively.
5. DERIVATIVE TRANSACTIONS
Written option activity for the Fund was as follows:
NUMBER
OF
WRITTEN OPTIONS CONTRACTS PREMIUMS
-----------------------------------------------------------------------------
Options outstanding at November 30, 2015... 1,970 $ 224,113
Options Written............................ 10,725 1,933,794
Options Expired............................ (7,770) (571,324)
Options Exercised.......................... (305) (21,867)
Options Closed............................. (3,515) (1,413,844)
--------- -----------
Options outstanding at May 31, 2016........ 1,105 $ 150,872
========= ===========
The following table presents the type of derivative held by the Fund at May 31,
2016, the primary underlying risk exposure and the location of these instruments
as presented on the Statement of Assets and Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
-------------------------------------- ----------------------------------------
DERIVATIVE STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENT RISK EXPOSURE LIABILITIES LOCATION VALUE LIABILITIES LOCATION VALUE
--------------- ---------------- ----------------------- -------------- ------------------------- --------------
Written Options Equity Risk -- -- Options written, at value $278,070
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the six months
ended May 31, 2016, on derivative instruments, as well as the primary underlying
risk exposure associated with each instrument.
Page 24
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
MAY 31, 2016 (UNAUDITED)
STATEMENT OF OPERATIONS LOCATION
---------------------------------------------------------------------------
EQUITY RISK EXPOSURE
Net realized gain (loss) on written options $ 247,079
Net change in unrealized appreciation (depreciation) on
written options (228,191)
The Fund does not have the right to offset financial assets and financial
liabilities related to option contracts on the Statement of Assets and
Liabilities.
6. BORROWINGS
The Fund entered into a committed facility agreement with Pershing LLC that has
a maximum commitment amount of $27,000,000. The borrowing rate under the
facility is equal to the 1-month LIBOR plus 70 basis points. The average amount
outstanding for the six months ended May 31, 2016, was $19,045,902, with a
weighted average interest rate of 1.12%. As of May 31, 2016, the Fund had
outstanding borrowings of $17,600,000 under this committed facility agreement.
The high and low annual interest rates for the six months ended May 31, 2016,
were 1.14% and 0.94%, respectively. The interest rate at May 31, 2016, was
1.14%.
7. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
8. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there was
the following subsequent event:
On July 11, 2016, the Fund declared a distribution of $0.17 per share to Common
Shareholders of record on July 26, 2016, payable July 29, 2016.
Page 25
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
MAY 31, 2016 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
--------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
Page 26
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
MAY 31, 2016 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Form N-Q's
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of the First Trust
Dividend and Income Fund was held on April 22, 2016 (the "Annual Meeting"). At
the Annual Meeting, James A. Bowen and Niel B. Nielson were elected by the
Common Shareholders of the First Trust Dividend and Income Fund as Class III
Trustees for a three-year term expiring at the Fund's annual meeting of
shareholders in 2019. The number of votes cast in favor of Mr. Bowen was
6,302,441, the number of votes against was 378,519 and the number of broker
non-votes was 1,578,557. The number of votes cast in favor of Mr. Nielson was
6,300,466, the number of votes against was 380,494 and the number of broker
non-votes was 1,578,557. Thomas R. Kadlec, Robert F. Keith and Richard E.
Erickson are the other current and continuing Trustees.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some, but not all,
of the risks that should be considered for the Fund. For additional information
about the risks associated with investing in the Fund, please see the Fund's
prospectus and statement of additional information, as well as other Fund
regulatory filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. Security prices can fluctuate for several reasons including
the general condition of the securities markets, or when political or economic
events affecting the issuers occur. When the Advisor or Sub-Advisor determines
that it is temporarily unable to follow the Fund's investment strategy or that
it is impractical to do so (such as when a market disruption event has occurred
and trading in the securities is extremely limited or absent), the Fund may take
temporary defensive positions.
MLP RISK: An investment in MLP units involves risks which differ from an
investment in common stock of a corporation. Holders of MLP units have limited
control and voting rights on matters affecting the partnership. In addition,
there are certain tax risks associated with an investment in MLP units and
conflicts of interest exist between common unit holders and the general partner,
including those arising from incentive distribution payments.
QUALIFIED DIVIDEND INCOME TAX RISK: There can be no assurance as to what portion
of the distributions paid to the Fund's Common Shareholders will consist of
tax-advantaged qualified dividend income. Certain distributions designated by
the Fund as derived from qualified dividend income will be taxed in the hands of
non-corporate Common Shareholders at the rates applicable to long-term capital
gains, provided certain holding period and other requirements are satisfied by
both the Fund and the Common Shareholders. Additional requirements apply in
determining whether distributions by foreign issuers should be regarded as
qualified dividend income. Certain investment strategies of the Fund will limit
the Fund's ability to meet these requirements and consequently will limit the
amount of qualified dividend income received and distributed by the Fund. A
change in the favorable provisions of the federal tax laws with respect to
qualified dividends may result in a widespread reduction in announced dividends
and may adversely impact the valuation of the shares of dividend-paying
companies.
OPTION RISK: The Fund may write (sell) covered call options on all or a portion
of the equity securities held in the Fund's portfolio as determined to be
appropriate by the Fund's Sub-Advisor, consistent with the Fund's investment
objective. The ability to successfully implement the Fund's investment strategy
depends on the Sub-Advisor's ability to predict pertinent market movements,
which cannot be assured. Thus, the use of options may require the Fund to sell
portfolio securities at inopportune times or for prices other than current
market values, may limit the amount of appreciation the Fund can realize on an
investment, or may cause the Fund to hold an equity security that it might
otherwise sell. There can be no assurance that a liquid market for the options
will exist when the Fund seeks to close out an option position. Additionally, to
the extent that the Fund purchases options pursuant to a hedging strategy, the
Fund will be subject to additional risks.
LEVERAGE RISK: The use of leverage results in additional risks and can magnify
the effect of any losses. If the income and gains from the securities and
investments purchased with such proceeds do not cover the cost of leverage, the
Common Shares' return will be less than if leverage had not been used. The funds
borrowed pursuant to a leverage borrowing program constitute a substantial lien
and burden by reason of their prior claim against the income of the Fund and
against the net assets of the Fund in liquidation. The rights of lenders to
receive payments of interest on and repayments of principal on any borrowings
made by the Fund under a leverage borrowing program are senior to the rights of
holders of Common Shares upon liquidation. If the Fund is not in compliance with
Page 27
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DIVIDEND AND INCOME FUND (FAV)
MAY 31, 2016 (UNAUDITED)
certain credit facility provisions, the Fund may not be permitted to declare
dividends or other distributions, including dividends and distributions with
respect to Common Shares or purchase Common Shares. The use of leverage by the
Fund increases the likelihood of greater volatility of NAV and market price of
the Common Shares. Leverage also increases the risk that fluctuations in
interest rates on borrowings and short-term debt that the Fund may pay will
reduce the return to the Common Shareholders or will result in fluctuations in
the dividends paid on the Common Shares.
INTEREST RATE RISK: The Fund's portfolio is also subject to interest rate risk.
Interest rate risk is the risk that fixed-income securities will decline in
value because of changes in market interest rates. Investments in debt
securities with long-term maturities may experience significant price declines
if long-term interest rates increase.
CREDIT RISK: The Senior Loans in which the Fund invests are also subject to
credit risk. Credit risk is the risk of nonpayment of scheduled contractual
repayments whether interest and/or principal payments or payments for services.
Credit risk also is the risk that one or more investments in the Fund's
portfolio will decline in price, or fail to pay interest or principal when due,
because the issuer of the security or contractual counterparty experiences a
decline in its financial status.
SENIOR LOAN RISK: In the event a borrower fails to pay scheduled interest or
principal payments on a Senior Loan held by the Fund, the Fund will experience a
reduction in its income and a decline in the value of the Senior Loan, which
will likely reduce dividends and lead to a decline in the net asset value of the
Fund's Common Shares. If the Fund acquires a Senior Loan from another Lender,
for example, by acquiring a participation, the Fund may also be subject to
credit risks with respect to that lender. Although Senior Loans may be secured
by specific collateral, the value of the collateral may not equal the Fund's
investment when the Senior Loan is acquired or may decline below the principal
amount of the Senior Loan subsequent to the Fund's investment. Also, to the
extent that collateral consists of stock of the borrower or its subsidiaries or
affiliates, the Fund bears the risk that the stock may decline in value, be
relatively illiquid, and/ or may lose all or substantially all of its value,
causing the Senior Loan to be under collateralized. Therefore, the liquidation
of the collateral underlying a Senior Loan may not satisfy the issuer's
obligation to the Fund in the event of non-payment of scheduled interest or
principal, and the collateral may not be readily liquidated.
LIQUIDITY RISK: The Fund invests a substantial portion of its assets in
lower-quality debt issued by companies that are highly leveraged. Lower-quality
debt tends to be less than higher-quality debt. Moreover, smaller debt issues
tend to be less liquid than larger debt issues. Although the resale, or
secondary market for Senior Loans is growing, it is currently limited. There is
no organized exchange or board of trade on which Senior Loans are traded.
Instead, the secondary market for Senior Loans is an unregulated inter-dealer or
inter-bank resale market. In addition, Senior Loans in which the Fund invests
may require the consent of the borrower and/or agent prior to the settlement of
the sale or assignment. These consent requirements can delay or impede the
Fund's ability to settle the sale of Senior Loans. If the economy experiences a
sudden downturn, or if the market for the Senior Loans in which the Fund invests
becomes distressed, the Fund may have difficulty disposing of Senior Loans if it
needs cash to repay debt, to pay dividends, to pay expenses or to take advantage
of new investment opportunities.
REIT RISK: Investing in REITs involves certain unique risks in addition to
investing in the real estate industry in general. REITs are subject to interest
rate risk (especially mortgage REITs) and the risk of default by lessees or
borrowers. An equity REIT may be affected by changes in the value of the
underlying properties owned by the REIT. A mortgage REIT may be affected by the
ability of the issuers of its portfolio of mortgages to repay their obligations.
REITs whose underlying assets are concentrated in properties used by a
particular industry are also subject to risks associated with such industry.
REITs may have limited financial resources, their securities may trade less
frequently and in a limited volume, and their securities may be subject to more
abrupt or erratic price movements than larger company securities.
Page 28
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Chartwell Investment Partners, LLC
1235 Westlakes Drive, Suite 400
Berwyn, PA 19312
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a) Not applicable.
(b) There has been no change, as of the date of this filing, in any of the
portfolio managers identified in response to paragraph (a)(1) of this Item
in the registrant's most recently filed annual report on Form N-CSR.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of trustees, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3(c))) are effective, as of a date within 90 days of the filing
date of the report that includes the disclosure required by this
paragraph, based on their evaluation of these controls and procedures
required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and
Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as
amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's second fiscal quarter
of the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section
302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section
906 of the Sarbanes- Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust Dividend and Income Fund
---------------------------------------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
principal executive officer)
Date: July 19, 2016
---------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: July 19, 2016
---------------
By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: July 19, 2016
---------------
* Print the name and title of each signing officer under his or her signature.