I remember reading Robyn Carr’s article years ago about the three rules of dialogue, which I copied onto 3 x 5 cards for future reference.
Rule #1: Dialogue should tell the reader something about the character’s personality or emotions, or at least reinforce something already established, like anger, timidity, cruelty, impatience or perfectionism. Instead of having a character greet someone by simply saying “hello,” have him say, “Where've you been?” or “Do you know what time it is?” while tapping his foot impatiently.
Rule #2: Dialogue needs to propel the plot forward while the reader gets to know the characters through the way they react to stimuli that directly affects their lives. Their conversations need to establish or reinforce their emotions, their relationships, and the roles they play in the plot to enhance conflict and tension. Even when writing comedy, the characters' reactions to one another are actually conflict in its truest sense.
Rule #3: Dialogue must individualize each character. No two characters should sound alike just as no two people use the same words or phrases. Each character needs to have his or her own expressions, dialects, euphemisms, speech styles and inflections. But that’s not all. They must also have their own value systems, motivations, personal habits and other traits that are expressed in dialogue.
For example, if you assigned each character a number instead of a name and gender, would they be distinguishable from one another?
Every line of dialogue has a job to do. When you’re editing and polishing a second draft, eliminate every word that doesn’t need to be there. People rarely speak in complete sentences so make sure your characters don’t sound as though they’re reciting an English lesson.
Creating a character sheet is a good way to establish who your characters really are. Describe each one physically and include his or her basic background information. Then consider pertinent information that will determine her dialogue. How well educated is she? Is her voice husky, squeaky, soft or loud? Does she have verbal ticks? Is he shy and does she stutter when she speaks? Does she use slang? Does he speak haltingly? Or is she articulate and chooses her words well?
How motivated is your protagonist? Is he aggressive, single-minded, abrasive, generous or power hungry? Any or all those traits should show up in his dialogue. Geographical differences also affect a character’s dialogue as does his education, or lack of schooling. If a character dropped out of school in the fifth grade, he won’t have an impressive vocabulary, unless he’s very motivated and schooled on his own. If that’s the case, make sure your reader knows it. One way is to have other characters talk about his education, or lack of schooling, when he’s not around, or praise him for it when he is.
According to Robin Carr, "Characters come alive when every bit of dialogue develops their personalities; when the action, tension and drama are heightened because of what they said, how they said it and when they chose to speak and when the characters’ complex individualism sets them apart from each other."