The use of crop rotation systems involving winter‐annual grazing can help peanut (Arachis hypogaea L.) producers increase profitability, although winter‐annual grazing could result in excessive soil compaction, which can severely limit yields. We conducted a 3‐yr field study on a Dothan loamy sand in southeastern Alabama to develop a conservation tillage system for integrating peanut with winter‐annual grazing of stocker cattle under dryland conditions. Winter‐annual forages and tillage systems were evaluated in a strip‐plot design, where winter forages were oat (Avena sativa L.) and annual ryegrass (Lolium mutiflorum L.). Tillage systems included moldboard and chisel plowing, and combinations of noninversion deep tillage (none, in‐row subsoil, or paratill) with/without disking. We evaluated soil water content, peanut leaf stomatal conductance, plant density, peanut yield, peanut net return, and total system annual net return. Peanut following oat increased soil water extraction (15%), stands (12%), and yields (21%) compared with peanut following ryegrass. Strict no‐till resulted in the lowest yields (2.29 Mg ha−1, 42% less than the mean) and noninversion deep tillage (especially in‐row subsoil) was required to maximize water use and yields with conservation tillage. Net return from annual grazing ($185 ha−1, USD) represented 40% of the total return for the best treatment (no‐tillage with in‐row subsoil following oat = $462 ha−1). Integrating winter‐annual grazing in this region using noninversion deep tillage following oat in a conservation tillage system can benefit peanut growers, allowing extra income without sacrificing peanut yields.