Many investors might consider cruise ship operator's Royal Caribbean's (NYSE:RCL) 1.8% dividend to be too paltry to mention. After all, its main rival Carnival (NYSE:CCL) pays a 2.4% yield, while the S&P 500 currently has an average yield of 2.3%. Nonetheless, investors interested in buying Royal Caribbean to capitalize on low oil prices and Chinese tourism should understand the history of its dividend, its sustainability, and the prospects of future increases.

Royal Caribbean's Quantum of the Seas. Source: company website.

Payout ratios
Over the past 12 months, Royal Caribbean and Carnival both paid out 37% of their free cash flows as dividends. Royal recently authorized a $500 million buyback program, indicating that it will dedicate more of its FCF on buybacks than dividends. By comparison, the company spent $265 million of its $721 million in FCF on dividends over the past 12 months.

On an EPS basis, Royal paid out 50% of its earnings per share over the past year, while Carnival paid out 58%. While Carnival's higher yield and payout ratio make it look more generous, it also means that Royal Caribbean has slightly more room to raise its dividend.

Analysts expect Royal to grow its earnings 42% to $4.81 per share in fiscal 2015, which ended on Dec. 31. Assuming that Royal keeps its payout ratio between 40% to 50%, it might raise its quarterly dividend from $0.38 to a range between $0.48 and $0.60 per share. Based on Royal's current price of $83, the high end of that range would bump its yield up to nearly 2%.

Inconsistent dividend increases
Royal Caribbean started paying a dividend when it went public in 1993. It initially raised that dividend consistently, but its quarterly dividend was stuck at $0.13 from 2000 to 2005 before being raised to $0.15. It remained at $0.15 until 2008, when it was suspended during the financial crisis. Royal brought back a $0.10 quarterly dividend in 2011 and has raised it every year since then.

RCL Dividend Chart

Source: YCharts

Carnival's dividend payments also haven't been consistent. After suspending its dividend for a year in 2009, it introduced a $0.10 dividend, bumped it up to $0.25 in 2011. It remained at $0.25 until last year, when it was finally raised to $0.30.

Bottom-line tailwinds
The key to big dividend payments is earnings growth, and Royal Caribbean's bottom line growth is clearly benefiting from lower oil prices. Last quarter, Royal's fuel costs fell 13% annually, which contributed to 29% growth in its adjusted earnings. Carnival's fuel costs plunged 46% last quarter, and its adjusted earnings rose 85%.

Back in 2014, Royal Caribbean introduced its "double-double" plan to raise its return on invested capital from 3.4% today to the double digits, while doubling its 2014 EPS of $3.39 by 2017. Lower fuel costs and streamlined fleets could help Royal achieve that goal ahead of schedule. After posting 42% growth this year, analysts expect its earnings to rise another 30% to $6.23 per share in fiscal 2016.

Carnival clearly benefited more from low fuel costs than Royal Caribbean last quarter, because of differences in fuel hedging. However, Carnival's revenue still fell 0.3% annually, because of lower ticket sales, which were partially offset by higher onboard revenues from food, drinks, and services. Royal's revenues rose 5%, thanks to growth in both ticket purchases and onboard revenues. Both companies are also relying heavily on expansions in China to boost their top-line growth. Royal Caribbean expects China to account for 9% of its total capacity in 2016, compared with 6% in 2015.

Source: Royal Caribbean.

But mind the risks
Royal Caribbean's near-term outlook looks positive, but investors should remember that its top-line growth depends on China, and its bottom-line growth is supported by cheap oil. If demand in China dips because of economic turmoil, or oil prices unexpectedly spike on regional conflicts or OPEC action, both catalysts could fade. Nonetheless, Royal Caribbean will probably raise its dividend in 2016 to keep pace with its earnings growth. While that increase won't attract serious income investors, it could be a nice bonus for current investors.