By Al Root

The war between Israel and Iran has added an element of uncertainty for investors seeking dividends in oil stocks. The sector, however, features a number of companies that have the financial discipline to weather the storm -- whichever way it goes.

West Texas Intermediate crude recently shot up 23% to $75 a barrel since the start of June, as tensions between Iran and Israel turned into full-blown war. The more the conflict heats up, the more the risk grows that energy infrastructure gets hit or the Strait of Hormuz, the waterway between Iran and Oman, is closed. A staggering 20%-30% of global oil demand moves through it daily. With attacks on energy facilities rising, "the risk of a serious supply outage [increases] significantly in an extended war scenario," says Helima Croft, RBC's head of global commodity strategy.

Before the conflict, oil prices had been sliding, falling below $60 in April on concerns about oversupply. OPEC announced a production increase in May, part of its plan to add some 2.2 million barrels a day of supply. Concerns about a potential global economic slowdown from the Trump administration's tariffs also weighed on prices. If the war ends, oil could tumble once again.

That's not an easy environment for investors to navigate. The average oil stock in the Russell 1000 yields about 3% and will pay out about 50% of estimated 2025 earnings as dividends, with those ratios subject to change based on what happens to oil prices. But by focusing on low-cost producers with strong financials, investors can find stocks that provide a margin of safety through all the volatility without sacrificing upside if oil prices stay higher for longer.

"No one has an edge in this market," says Smead Capital Management CEO Cole Smead, who recommends focusing on companies with strong returns on invested capital, which signal low costs and strong management. He especially favors companies with the ability to hedge their production and lock in high prices.

Smead likes APA and Diamondback Energy, which yield 4.9% and 2.6%, respectively, pay out less than 40% of expected 2025 net income in dividends, and have asset returns in line with the industry average.

Large companies can offer some safety, too, because of their strong balance sheets and diversified businesses, and they also have exposure to stronger oil prices, says Morgan Stanley analyst and commodities strategist Devin McDermott. One of his favorites: Exxon Mobil. It's expected to pay out about 60% of estimated 2025 net income in dividends -- higher than average, but it comes with a higher-than-average yield of 3.5%.

McDermott also likes Devon Energy and Permian Resources, two U.S.-focused stocks that yield 2.8% and 4.1%, respectively. They pay out roughly 40% of expected 2025 earnings as dividends, but those earnings would rise if oil prices stay north of $70 per barrel, and the dividends look secure even if oil prices drop to $50.

Even some Canadian oil stocks look attractive. Looking north of the border, RBC analyst Michael Harvey recently added shares of Calgary-based ARC Resources to his "best ideas" list. Shares yield 2.4%, lower than the Russell 1000 average, but the company pays out only 30% of expected net income and supplements regular payouts with share repurchases.

That's a smart strategy, says Smead, who prefers the flexibility and tax efficiency of buybacks over dividends. Buybacks also show a focus on capital return over expanding production when prices spike. And it's something all these stocks have done during the past 12 months.

Even during a time of war, the focus on low costs, safe payouts, and share repurchases looks like a winning formula for oil-stock dividends.

Write to Al Root at allen.root@dowjones.com

To subscribe to Barron's, visit http://www.barrons.com/subscribe

(END) Dow Jones Newswires

June 20, 2025 21:30 ET (01:30 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.