Three companies tracked in the How They Rate coverage universe cut dividends last month: Canfor Pulp Products Inc (TSX: CFX, OTC: CFPUF), Talisman Energy Inc (TSX: TLM, NYSE: TLM) and Zargon Oil & Gas Ltd (TSX: ZAR, OTC: ZARFF). All three were primarily victims of falling prices for the commodities they produce. That’s pulp for Canfor and natural gas and oil for the other two.

Canfor slashed its quarterly dividend by 77.2 percent to a new rate of CAD0.05 a share. That’s the third consecutive quarterly cut, going back to February when the company paid CAD0.40. That rate was 47 percent below the CAD0.25 per share monthly rate the company paid as an income trust before it converted to a corporation in January 2011.

Rising and falling dividends are nothing new for Canfor. Six years ago, when it was organized as an income trust, it paid a regular monthly distribution of CAD0.12 along with a special cash disbursement of CAD0.08. That was raised to CAD0.14 for the regular payment and CAD0.22 for a special dividend in early 2007.

In June 2007, however, the payout was cut to a regular cash monthly payout of CAD0.18, as special distributions were suspended. Then came a two-step reduction to CAD0.12 in late 2007, followed by a slash to CAD0.04 in January 2009 and finally a cut to CAD0.01 with the March 2009 payment. The rate stayed there until December, when it quintupled to CAD0.05, rose to CAD0.08 in January, CAD0.12 in March, CAD0.20 in June, CAD0.22 in August and finally to CAD0.25 a month in October 2010.

The root of that volatility is fluctuating global market conditions for the company’s pulp and paper products. The 93 percent slide in second-quarter net income was also the result of lower output, due in parts to scheduled maintenance outages and an unscheduled plant shutdown. That’s not expected to impact earnings going forward, however, as the company’s low-cost facilities are now back up and running.

When he announced the dividend cut, CEO Joe Nemeth asserted that “assuming the world doesn’t implode” the company’s dividend would return to the old “range” later in 2012. That may now be in doubt following his surprising decision to step down from the company in September.

But in any case, no one should own this stock who can’t live the possibility of another dividend cut for the promise of rapid dividend increases when conditions improve. I rate Canfor Pulp Products a hold, mainly because its price has dropped to reflect the risk.

Talisman cut its dividend in half following another disappointing quarter due to falling natural gas prices. Second-quarter earnings were 72 percent below last year’s level, as the combination of weakening oil and natural gas prices (down 48 percent) offset a 5 percent boost in overall output.

Talisman’s strategy going forward is to be considerably more conservative with its cash and to seek financial backers to develop its still-extensive global reserves. The company, for example, has sold a 49 percent stake in its North Sea offshore oil business for CAD1.5 billion to China Petroleum & Chemical Corp (Hong Kong: 386, NYSE: SNP), better known as Sinopec. It’s also cut back on development efforts in the Marcellus Shale of Pennsylvania, where its gas reserves have fewer liquids than in other areas. And it’s focused on development efforts in Asia, where gas prices are considerably higher.

Speculation is the company will also seek a partner to develop its reserves in the Montney Shale of Alberta. In any case, the dividend has now been hacked down to the point where it won’t likely affect Talisman’s share price, no matter what happens. Unfortunately, that also means the yield is no longer an attraction.

The stock has surged over the past month, in part no doubt because China’s China National Offshore Oil Corp, known as CNOOC, is paying a big premium for rival Canadian oil company Nexen Inc (TSX: NXY, NYSE: NXY).

That’s enough reason to continue to hold Talisman if you do already. But there are more attractive candidates for purchase in the energy patch now, including Best Buy Vermilion Energy Inc (TSX: VET, OTC: VEMTF).

That’s also true of Zargon, though I’ve changed my rating to hold given the recent slide in the stock. The company plans to reduce its monthly payout by another 40 percent, from CAD0.10 to CAD0.06 a share. That follows a 9 percent drop in funds flow from operating activities for the second quarter, the account from which dividends are paid. Oil production was 2 percent lower, while gas output was 13 percent below first quarter levels due to shut-ins.

Based on the old dividend rate of CAD0.010 per month, the second-quarter payout ratio came in at 60 percent of funds from operations. That drops to just 36 percent at the lowered rate, though third-quarter numbers are likely to be higher barring a sharp rebound in energy prices this month and next. Encouragingly, operating costs were brought down by 6 percent from last year’s tally, breaking an alarming string of increases.

As was the case with the previous dividend cut, Zargon has couched this one as a response to weak spot and forward energy prices, and their impact on its plans for asset sales. That’s reasonable.

Unfortunately, the company’s development efforts, dividends and balance sheet health remain at the mercy of future energy price declines. Consequently, I’m leaving it on the Watch List for now. Zargon is a hold.

Here’s the current Watch List.  The analysis below reflects a large number of second-quarter 2012 earnings releases and guidance calls as well as debt maturing through the end of 2013.

Aston Hill Income Fund’s (TSX: VIP-U, OTC: BVPIF) No. 1 problem is still that the closed end fund’s holdings yield far less than the fund itself, meaning the cash is funded by capital and leverage.

I’m also less than excited about the heavy reliance on financial stocks, a solid sector but one with relatively low yields and a heavy correlation to market averages. Swap Aston Hill for the Mutual Fund Alternatives in the Canadian Edge Portfolio. Sell.

AvenEx Energy Corp (TSX: AVF, OTC: AVNDF), a small oil and gas proucer, won’t report second-quarter earnings until next week at the earliest. But the drop in oil this spring and summer bodes ill, even with gas bouncing back a bit. Hold.

Bonavista Energy Corp (TSX: BNP, OTC: BNPUF), a gas and gas liquids-rated producer, has solid operations and reserves but may need to cut its payout if energy prices don’t rebound. Buy under USD18.

Canfor Pulp Products Inc (TSX: CFX, OTC: CFPUF) is discussed above. Hold.

Chorus Aviation Inc (TSX: CHR/B, OTC: CHRVF) won’t report second-quarter earnings until next week, and there’s nothing to suggest the numbers won’t come out in line with guidance and supportive of the current dividend.

Unfortunately, the key issue here is the still unresolved dispute with cash-strapped Air Canada Inc (TSX: AC/A, OTC: AIDIF), which absorbs a fair chunk of the company’s cost structure. The company also appears to be facing a strike that could interrupt its current revenue stream, and its 33 percent investment in Uruguay’s leading airline is in limbo.

Encouragingly, the company has ordered six new aircraft and has plans to expand in Nova Scotia. But until there’s a deal with Air Canada, risk of a plunge to CAD2 or lower is substantial. Sell.

Colabor Group Inc (TSX: GCL, OTC: COLFF) is moving off the Watch List this month. I review the company’s solid second-quarter results in Portfolio Update. Buy under USD10.

Data Group Inc (TSX: DGI, OTC: DGPIF) is definitely priced for a dividend cut, in fact a quite steep one. But based on numbers we’ve seen, overall revenues are stable, as digital products growth offsets a shrinking traditional business.

The only two analysts covering the stock have wildly divergent opinions, a circumstance that goes a long way toward explaining the volatility in the stock. Whether it’s resolved up or down will depend on what happens to the dividend. But the yield of nearly 15 percent appears to price in the worst-case scenario. Hold.

Enerplus Corp (TSX: ERF, NYSE: ERF) still appears to have a number of loyalists, who seem to find justification for holding on in the summer surge in natural gas and the takeover of Progress Energy Resources Corp (TSX: PRQ, OTC: PRQNF).

The halving of the dividend with the July payment does mean the current rate is more conservative. But this is still a company with apparently no hedges on its gas output and very ambitious capital spending plans, and the balance drawn on its credit lines is rising.

My feeling is management will avoid another dividend cut, but if there is one the stock is headed for single digits. Sell.

EnerVest Energy & Oil Sands Trust’s (TSX: EOS, OTC: EOSOF) holdings pay little in dividends, but management has committed to a generous cash payout nonetheless. Salvation could come from a surge in oil prices later this year.

But for now dividend investors should switch to one of the Canadian Edge Portfolio’s Mutual Fund Alternatives. Sell.

Extendicare Inc (TSX: EXE-U, OTC: EXETF) comes off the Watch List this month. I highlight second-quarter numbers in Portfolio Update. Buy under USD9.

FP Newspapers Inc’s (TSX: FP, OTC: FPNUF) second-quarter numbers aren’t due until Aug. 15. But it seems likely the print business continued to deteriorate.

Management is highly invested in the company’s success, with 30.5 percent ownership of the stock, and so would be loathe to cut the payout. It may not have a choice, however. Sell.

GMP Capital Inc (TSX: GMP, GMPXF) reported a loss in the second quarter, as was the case in the first quarter. The company appears to be holding market share for its key niches. But until market conditions improve it’s hard to see how management can maintain a cash dividend, though insiders do own 15.2 percent of the stock. Hold.

Labrador Iron Ore Royalty Corp’s (TSX: LIF-U, OTC: LIFZF) fortunes depend on iron ore prices, which are set globally and will determine what, if anything, it can pay in dividends. Hold.

New Flyer Industries Inc (TSX: NFI, OTC: NFYED), which manufactures buses, will cut its dividend in half starting this summer. That’s a move bound to surprise some investors, though the company has continually telegraphed it for the better part of a year.

The more important consideration going forward is how the business is responding to what are abysmal conditions for bus sales. Second-quarter cash flow, for example, was slammed by 18.3 percent, as lower revenues and selling margins offset management’s efforts to rein in costs. The payout ratio soared to 164 percent, while order backlog slipped from first quarter levels.

Management does expect improvement in the second half of the year, and for now there’s cash to pay the lower dividend. But this company’s still not out of the woods yet. Sell.

Precious Metals & Mining Trust (TSX: MMP-U, OTC: PMMTF) trades for a premium of 28 percent above the value of its assets, mainly because investors are sticking with the yield even while portfolio value plunges. The share price has been falling as well but the bottom is still likely to drop out when management finally cuts the payout as seems inevitable. Sell.

Ten Peaks Coffee Company Inc (TSX: TPK, OTC: SWSSF) has been in a scramble its entire existence, and the result has been a 78 percent cut in the dividend since the initial public offering.

Unfortunately, the Canadian dollar’s summer surge will hurt this company yet again. Sell.

TransAlta Corp’s (TSX: TA, NYSE: TAC) payout ratio is quite low as a percentage of cash flow and does appear to support the current dividend rate. Still, the 35 percent drop in funds from operations demonstrates business weakness that’s likely to continue in the second half of the year. Hold.

Zargon Oil & Gas Ltd (TSX: ZAR, OTC: ZARFF) is discussed above. Hold.