Dear Shareholder,

 

The problems in the U.S. financial system and the slowdown in global economic activity continue to create a very difficult environment for the U.S. economy. The administration, the Federal Reserve System and Congress have initiated a variety of programs directed at restoring liquidity to the financial markets, providing financial support for critical financial institutions and stimulating economic activity. There are encouraging signs that these initiatives are beginning to have a constructive impact. It is not possible to predict whether the actions taken to date will be sufficient to restore more normal conditions in the financial markets or enable the economy to stabilize and set a course toward recovery. However, the speed and scope of the government’s actions are very encouraging and, more importantly, reflect a commitment to act decisively to meet the economic challenges we face.

 

The performance information in the attached report reflects the impact of many forces at work in the equity and fixed-income markets. The comments by the portfolio managers describe the strategies being used to pursue your Fund’s long-term investment goals. Parts of the financial markets continue to experience serious dislocations and thorough research and strong investment disciplines have never been more important in identifying risks and opportunities. I hope you will read this information carefully.

 

Your Board is particularly sensitive to our shareholders’ concerns in these uncertain times. We believe that frequent and thorough communication is essential in this regard and encourage you to visit the Nuveen website: www.nuveen.com, for recent developments in all Nuveen funds. We also encourage you to communicate with your financial consultant for answers to your questions and to seek advice on your long-term investment strategy in the current market environment.

 

Nuveen continues to work on resolving the issues related to the auction rate preferred shares situation, but the unsettled conditions in the credit markets have slowed progress. Nuveen is actively pursuing a number of solutions, all with the goal of providing liquidity for preferred shareholders while preserving the potential benefits of leverage for common shareholders. We appreciate the patience you have shown as we work through the many issues involved.

 

On behalf of myself and the other members of your Fund’s Board, we look forward to continuing to earn your trust in the months and years ahead.

 

Sincerely,

Robert P. Bremner

Chairman of the Nuveen Fund Board

August 24, 2009

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Portfolio Managers’ Comments

 

 

Nuveen Diversified Dividend and Income Fund (JDD)

 

JDD features portfolio management by teams at four separate sub-advisers.

 

NWQ Investment Management Company, LLC, (NWQ), an affiliate of Nuveen Investments, invests its portion of the Fund’s assets in dividend-paying common stocks. Jon Bosse, Chief Investment Officer of NWQ, leads the Fund’s management team at that firm. He has more than 27 years of corporate finance and investment management experience.

 

The real estate portion of the Fund’s investment portfolio is managed by a team at Security Capital Research & Management Incorporated, (Security Capital), a wholly-owned subsidiary of JPMorgan Chase & Co. Anthony R. Manno Jr., Kenneth D. Statz and Kevin Bedell, who each have more than 27 years experience in managing real estate investments, lead the team.

 

Symphony Asset Management, LLC, (Symphony), an affiliate of Nuveen Investments, invests its portion of the Fund’s assets primarily in senior loans. The Symphony team is led by Gunther Stein, the firm’s Chief Investment Officer. Gunther has more than 20 years of investment management experience.

 

Wellington Management Company, LLP, (Wellington), invests its portion of the Fund’s assets in emerging markets sovereign debt. James W. Valone, who has more than 18 years of investment management experience, heads the team.

 

Here representatives from NWQ, Symphony, Security Capital, and Wellington talk about their management strategies and the performance of the Fund for the six-month period ending June 30, 2009.

 

What key strategies were used to manage the Fund over this reporting period?

 

 

For the equity portion of the Fund’s portfolio, we continued to employ an opportunistic, bottom-up strategy that focused on identifying undervalued companies possessing favorable risk/reward characteristics as well as emerging catalysts that can unlock value or improve profitability. These catalysts included management changes, restructuring efforts, recognition of hidden assets, or a positive change in the underlying fundamentals. We also focused on downside protection, and paid a great deal of attention to a company’s balance sheet and cash flow statement, not just the income statement. We believed that cash flow analysis offered a more objective and truer picture of a company’s financial position than an evaluation based on earnings alone.

 

In managing the real estate portion of the portfolio, we sought to maintain significant property type and geographic diversification while taking into account company credit quality, sector, and security-type allocations. Investment decisions are based on a multi-layered analysis of the company, the real estate it owns, its management, and the relative

4		Nuveen Investments

price of the security, with a focus on securities that we believe will be best positioned to generate sustainable income and potential price appreciation over the long-run. Across all real estate sectors, we favored companies with properties located in the strongest urban locations. These “high barrier to entry” markets often have constraints that limit new construction, a quality that we believe over the long-term has the potential to provide superior value enhancement and a real inflation hedge. The severe deterioration in credit markets in 2008 and early 2009 required an equally strong re-appraisal of the financial flexibility of each company in which we invest. As the credit environment changed we adjusted the portfolio away from companies that we believed were not as well positioned in the current tough environment.

 

In the senior loan portion of the Fund, we continued to find value in the senior parts of many firms’ capital structures, as well as within the convertible securities market. In a number of cases, we believed that both senior loans and convertibles remained significantly undervalued on an implied basis, even after the recent rally. The first half of this year was characterized by a broad-based technical move in many areas of the market. Over the first two quarters alone, over $30 billion of new-issue high yield bonds have been used to pay down shorter-dated term loans. This is a positive in most cases for the secured lender, as many of these issuers suffer more from bad balance sheets than bad business models. From a technical perspective, we preferred to own senior loans and convertibles rather than other forms of debt. Senior loans generally carry floating rates, and they historically have outperformed fixed-rate bonds in a rising interest rate environment. We also felt that there was potential to see continued crossover demand in the convertible bond market from equity accounts buying convertible bonds because of better perceived values.

 

In the emerging markets debt portion of the Fund’s portfolio, we focused on differentiating between countries and paid close attention to the underlying credit fundamentals in order to find the best opportunities in this market. Improving trends across the globe did not benefit all countries equally. There continued to be large differences between countries within emerging markets, and we believe the market will continue to differentiate between countries based on their monetary policy framework, balance-of-payments and economic vulnerabilities, and political risks.

 

How did the Fund perform over the six-month period?

 

 

The performance of JDD, as well as a comparative benchmark and general market index, is presented in the accompanying table.

 

Average Annual Total Returns on Common Share Net Asset Value*

For periods ended 6/30/09

 

		6-Month		1-Year		5-Year
JDD		12.36%		-28.63%		-1.65%
Comparative Benchmark1		11.44%		-18.74%		1.55%
S&P 500 Index2		3.16%		-26.21%		-2.24%

 

For the six-month period ended June 30, 2009, the total return on common share net asset value for the Fund significantly outperformed the comparative benchmark and general market index. The Fund’s leveraged capital structure in the generally favorable

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market conditions found during the second quarter of 2009 served as a primary driver for the Fund’s performance in the first half of 2009. By contrast, leverage had a generally detrimental effect on the Fund’s return during the negative market environment in the second half of 2008, as can be seen in the one-year returns shown here. (Please see p. 7 for more information on the Fund’s capital structure and financial leverage).

 

In the equity portion of the Fund’s portfolio managed by NWQ, JPMorgan Chase & Co. appreciated as the company seemed to have successfully solidified its position as one of the “survivors” of the on-going global banking crisis. The strength of JPMorgan was also seen in its record fixed-income trading revenue for the first quarter as the company reaped the benefits of abnormal bid/ask spreads on bond trading because it was one of a few banks (including Goldman Sachs) that could provide liquidity in the market.

 

Our investment in Microsoft Corp. benefited from positive investor reaction to the company’s successful cost cuts and the upcoming corporate product upgrade cycle that should help drive revenue growth. The company also received several upgrades from sell-side analysts which has helped support the stock price. Packaging Corp. of America also outperformed for the period as the company continued to show improving fundamentals, report earnings above expectations, and remains well positioned for a cyclical recovery in the economy.

 

While our investment in Hartford Financial Services Group Inc. declined for the period, the shares were very volatile. After hitting a 52-week low in early March, the shares appreciated by nearly 350% by early May ($4 to $18) as the financial sector rallied on increased investor confidence in the sector. Shares of Hartford specifically benefited from news that the company would receive Troubled Asset Relief Program (TARP) funds, as well as speculation that it is close to a deal to sell its property and casualty business. While portfolio holdings MetLife Inc. and Travelers Companies Inc. did not need TARP assistance, their shares also declined for the period as rising realized and unrealized losses and declining equity markets put a strain on regulatory capital for companies with exposure to equity-sensitive insurance products such as variable life and variable annuities.

 

Shares of Wells Fargo Inc. also bottomed with the rest of the market in early March (hitting a 52-week low of $8) before rebounding 200% by the end of the period. Although considered one of the better positioned U.S. banks capable of surviving the current economic environment, the company remains exposed to ongoing credit deterioration and a potential for futures losses from increasing credit costs.

 

The decline in Raytheon Co. during the period had less to do with the company’s fundamentals and more to do with investor speculation on reduced defense spending by the Obama Administration. Although we believe that the Obama defense plan will most likely slow the top-line growth of defense companies, we think current valuations discount a far more negative outcome than what will most likely occur.

 

We were able to add a few new positions to the Fund over the reporting period. We initiated a position in insurance holding company, Reinsurance Group of America Inc. (RGA), in February after shares of the company declined in line with the rest of the insurance sector on investors concerns that insurance companies were at risk to suffer losses similar to those experienced by banks. RGA is primarily engaged in traditional individual life, critical illness, and financial reinsurance.

6		Nuveen Investments

 

We also invested in Loews Corp. as our calculation of the stock’s discount to the sum of its parts exceeded 30%, more than double its historical average. We invested in TransAtlantic Holdings Inc. (TRH), a leading global reinsurer that is well diversified both in terms of products and geography with a focus on the casualty insurance markets. We eliminated our position in TRH shortly after its purchase to take advantage of an immediate profit. We also purchased a U.S. Steel convertible bond on a public offering as the company was raising additional capital, and then sold that position to realize the gain.

 

The Fund’s exposure to real estate investment trusts (REITs) with significant office and multi-family properties located in the New York City real estate markets experienced relatively poor performance over the six-month period due to investor concerns about the long-term negative effects of an extended decline in the financial service industry.

 

Another factor impacting performance for the six-month period was the broad and technical upward move in the senior loan market. The Fund did have exposure to both VNU Nielsen and Charter Communication, two large positions which outperformed the market on a relative basis. VNU had strong operating results, while Charter filed for bankruptcy–a move that was beneficial to senior lenders given the company’s strong assets which collateralize the term loan. The VNU Nielsen position was eliminated before the end of the period.

 

In the emerging markets debt portion of the portfolio, the Fund benefited from its relative underweight position in China, where deterioration in the Sino-American trade balance appears to be one of the unintended consequences of the U.S. economic stimulus policy. A relative underweight to Trinidad & Tobago also contributed positively to performance. Trinidad & Tobago (-11.9%) was one of the worst performing emerging markets during the period, largely as a result of a larger than expected slowdown in Latin America that appeared in January. The Fund also benefited from a comparative underweight to Egypt, where the global economic slowdown, liquidity crisis, and risk reduction have meant significant outflows from Egyptian capital markets, with the country’s current account moving from surplus to deficit. A relative overweight to the Philippines contributed positively to performance, as lower oil prices held inflation down across the region and provided the Philippine central bank with sufficient leeway for aggressive monetary easing amid slowing business activity.

 

Conversely, the Fund’s comparative underweight positions in the Ukraine (+89.8%), Pakistan (+94.5%), the Dominican Republic (+50.1%), and Gabon (+37.8%) detracted from relative performance. The Ukraine, Pakistan, and the Dominican Republic all rose following pledges of support from the International Monetary Fund (IMF), reducing the risks of investing there. The Ukraine also benefited from revised, less extreme downside forecasts in Europe than were previously issued. Gabon advanced on the announcement of a plan created in conjunction with the IMF to diversify their economy and become less dependent on oil revenues.

 

RECENT DEVELOPMENTS REGARDING THE FUND’S LEVERAGED CAPITAL STRUCTURE

 

Shortly after its inception in 2003, the Fund issued FundPreferred shares to create financial leverage. The Fund uses leverage because its managers believe that, over time, leveraging provides opportunities for additional income and total return for common shareholders.

Nuveen Investments		7

However, use of leverage also can expose common shareholders to additional risk—especially when market conditions are unfavorable. For example, if the prices of securities held by the Fund decline, the negative impact of these valuation changes on common share net asset value and common shareholder total return would be magnified by the use of leverage.

 

As noted in the last several shareholder reports, the auction rate preferred shares issued by many closed-end funds, including this Nuveen Fund, have been hampered by a lack of liquidity since February 2008. Since that time, more auction rate preferred shares have been submitted for sale in their regularly scheduled auctions than there have been offers to buy. This means that these auctions have “failed to clear,” and that many, or all, of the auction rate preferred shareholders who wanted to sell their shares in these auctions were unable to do so. This decline in liquidity in auction rate preferred shares did not lower the credit quality of these shares, and auction rate preferred shareholders unable to sell their shares received distributions at the “maximum rate” applicable to failed auctions, as calculated in accordance with the pre-established terms of the auction rate preferred shares.

 

One continuing implication for JDD common shareholders from the auction failures is that the Fund’s cost of leverage likely has been incrementally higher at times than it otherwise might have been had the auctions continued to be successful. As a result, the Fund’s common share earnings likely have been incrementally lower at times than they otherwise might have been.

 

Beginning in the summer of 2008, the Fund announced its intention to redeem most or all of its FundPreferred shares and retain its leveraged structure primarily through the use of borrowings. The Fund began a series of periodic, partial redemptions in September 2008, and on June 10, 2009, it announced its intention to redeem all of its remaining outstanding FundPreferred shares. This final redemption is contingent on favorable market conditions and temporary relief from the Securities and Exchange Commission from certain technical regulatory provisions. The Fund cannot provide any assurance about if or when this regulatory relief might be granted and if or when these last outstanding FundPreferred shares might be redeemed.

 

As of June 30, 2009, the Fund had redeemed $105 million, at par, of its FundPreferred shares, representing 87.5% of the total amount originally issued by the Fund.

 

Leveraging using borrowings offers common shareholders most of the same potential benefits and risks as leveraging with FundPreferred.

 

For up-to-date information, please visit the Nuveen CEF Auction Rate Preferred Resource Center at: http://www.nuveen.com/ResourceCenter/AuctionRatePreferred.aspx.

8		Nuveen Investments

 

Common Share Distribution
and Share Price Information

 

 

The following information regarding your Fund’s distributions is current as of June 30, 2009, and likely will vary over time based on the Fund’s investment activities and portfolio investment value changes.

 

The Fund reduced its quarterly distribution to common shareholders once over the six-month reporting period. Some of the important factors affecting the amount and composition of these distributions are summarized below.

 

The Fund employs financial leverage through the use of FundPreferred shares and/or bank borrowings. Financial leverage provides the potential for higher earnings (net investment income), total returns and distributions over time, but—as noted earlier—also increases the variability of common shareholders’ net asset value per share in response to changing market conditions. Over the reporting period, the impact of financial leverage on the Fund’s net asset value per share contributed positively to the income return and detracted from the price return. The overall impact of financial leverage detracted from the Fund’s total return.

 

The Fund has a managed distribution program. The goal of this program is to provide common shareholders with relatively consistent and predictable cash flow by systematically converting the Fund’s expected long-term return potential into regular distributions. As a result, regular common share distributions throughout the year are likely to include a portion of expected long-term gains (both realized and unrealized), along with net investment income.

 

Important points to understand about the managed distribution program are:

 

•	The Fund seeks to establish a relatively stable common share distribution rate that roughly corresponds to the projected total return from its investment strategy over an extended period of time. However, you should not draw any conclusions about the Fund’s past or future investment performance from its current distribution rate.
•	Actual common share returns will differ from projected long-term returns (and therefore the Fund’s distribution rate), at least over shorter time periods. Over a specific timeframe, the difference between actual returns and total distributions will be reflected in an increasing (returns exceed distributions) or a decreasing (distributions exceed returns) Fund net asset value.
•	Each distribution is expected to be paid from some or all of the following sources:

 

	•	net investment income (regular interest and dividends),
	•	realized capital gains, and
	•	unrealized gains, or, in certain cases, a return of principal (non-taxable distributions).

 

•	A non-taxable distribution is a payment of a portion of the Fund’s capital. When the Fund’s returns exceed distributions, it may represent portfolio gains generated, but not realized as a taxable capital gain. In periods when the Fund’s returns fall short of

Nuveen Investments		9

	distributions, the shortfall will represent a portion of your original principal, unless the shortfall is offset during other time periods over the life of your investment (previous or subsequent) when the Fund’s total return exceeds distributions.

 

•

Because distribution source estimates are updated during the year based on the Fund’s performance and forecast for its current fiscal year (which is the calendar year for the Fund), estimates on the nature of your distributions provided at the time the distributions are paid may differ from both the tax information reported to you in your Fund’s IRS Form 1099 statement provided at year end, as well as the ultimate economic sources of distributions over the life of your investment.

 

The following table provides estimated information regarding the Fund’s common share distributions and total return performance for the six months ended June 30, 2009. The distribution information is presented on a tax basis rather than on a generally accepted accounting principles (GAAP) basis. This information is intended to help you better understand whether the Fund’s returns for the specified time period were sufficient to meet the Fund’s distributions.

 

As of 6/30/09 (Common Shares)		JDD
Inception date			9/25/03
Six months ended June 30, 2009:
Per share distribution:
From net investment income			$0.24
From realized capital gains			0.00
Tax return of capital			0.18
Total per share distribution			$0.42
Distribution rate on NAV			4.75%
Annualized total returns:
Excluding retained gain tax credit/refund3:
Six-Month (Cumulative) on NAV			12.36%
1-Year on NAV			-28.63%
5-Year on NAV			-1.65%
Since inception on NAV			-0.40%
Including retained gain tax credit/refund3:
Six-Month (Cumulative) on NAV			12.36%
1-Year on NAV			-28.63%
5-Year on NAV			-0.77%
Since inception on NAV			1.18%

 

Common Share Repurchases and Share Price Information

 

The Fund’s Board of Trustees approved an open-market share repurchase program on July 30, 2008, under which the Fund may repurchase an aggregate of up to 10% of its

10		Nuveen Investments

outstanding common shares. As of June 30, 2009, the Fund had cumulatively repurchased common shares as shown in the accompanying table.

 

Common Shares		% of Outstanding
Repurchased		Common Shares
37,300			0.2%

 

During the six-month reporting period, the Fund’s common shares were repurchased at a weighted average price and a weighted average discount per common share as shown in the accompanying table.

 

Weighted Average		Weighted Average
Price Per Share		Discount Per Share
Repurchased		Repurchased
$7.09			19.46%

 

As of June 30, 2009, the Fund’s common share price was trading at a discount of -18.87%, compared with an average discount over the six-month period of -22.53%.

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JDD Performance OVERVIEW			Nuveen Diversified Dividend and Income Fund
			as of June 30, 2009

 

 

Portfolio Allocation (as a % of total investments)²

 

 

2008-2009 Distributions Per Common Share

 

 

Common Share Price Performance—Weekly Closing Price

 

1	Current Distribution Rate is based on the Fund’s current annualized quarterly distribution divided by the Fund’s current market price. The Fund’s quarterly distributions to its shareholders may be comprised of ordinary income, net realized capital gains and, if at the end of the calendar year the Fund’s cumulative net ordinary income and net realized gains are less than the amount of the Fund’s distributions, a return of capital for tax purposes.
2	Excluding investments in derivatives.
3	As previously explained in the Common Share Distribution and Share Price Information section of this report, the Fund elected to retain a portion of its realized long-term capital gains for the tax years ended December 31, 2007 and December 31, 2006, and pay required federal corporate income taxes on these amounts. These standardized total returns include the economic benefit to Common shareholders of record of this tax credit/refund. The Fund had no retained capital gains for the tax year ended December 31, 2008.

12		Nuveen Investments