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The numerical dispersion characteristics of the recently developed three-dimensional unconditionally stable locally- one-dimensional finite-difference time-domain (LOD-FDTD) method are derived analytically. The effect of grid size and the Courant Friedrich Lewy (CFL) limits on dispersion are studied in detail. The LOD-FDTD method allows larger time steps as compared to the conventional FDTD method (CFL limit). The analysis shows that the unconditionally stable three-dimensional LOD-FDTD method has an advantage over the conventional FDTD method when modeling structures that require fine grids. The LOD-FDTD method allows larger CFL numbers as long as the dispersion error remains in acceptable range.