What is the dotted blue underlining when I use dictation on OS X?
This highlighting "hyperlinks" the text, if the system is unsure of what you said. It will typically take a couple of best guesses, and display them as options from which you can choose from. You can see the suggestions by right-clicking the word or control clicking it.

It also selects the text when you click on it, which allows you to simply type a replacement if the options provided aren't correct.

This article may provide helpful information on dictation.