Q I like OS X’s dictation facility, but cannot get it to offer me replacement text for words or phrases which it underlines with blue dots. What do I need to tweak?
A If you have not already done so, open the Dictation & Speech pane, select the Dictation tab, turn it on, and check the box to Use Enhanced Dictation.

Also ensure the correct language is selected there, in the Language & Region pane, and to correct spelling automatically in the Text tab of the Keyboard pane.
If each is lined up correctly and you still do not see any suggested corrections, it may be that the dictation system does not have any to offer: try it with words like there/their, perhaps.
Comments Enhanced Dictation provides two important benefits over the regular setting: OS X converts your speech into text continuously, allowing you to dictate at an even pace. It also performs speech to text conversion on your Mac, rather than relying on remote server-based conversion via the Internet.
The first time that you turn Enhanced Dictation on, your Mac will need to download additional components from Apple, so give it time to do so; this will require some additional disk space. Once they have been installed, your Mac should be ready to go.
Apple provides more tips and information here.
Updated from the original, which was first published in MacUser volume 30 issue 01, 2014.