Numerous theoretical studies have investigated how limited dispersal may provide an explanation for the evolution of cooperation, by leading to interactions between relatives. However, despite considerable theoretical attention, there has been a lack of empirical tests. In this article, we test how patterns of dispersal influence the evolution of cooperation, using iron-scavenging in the bacterium Pseudomonas aeruginosa as our cooperative trait. We found that relatively limited dispersal does not favor cooperation. The reason for this is that although limited dispersal increases the relatedness between interacting individuals, it also leads to increased local competition for resources between relatives. This result supports Taylor's prediction that in the simplest possible scenario, the effects of increased relatedness and local competition exactly cancel out. In contrast, we show that one way for cooperation to be favored is if individuals disperse in groups (budding dispersal), because this maintains high relatedness while reducing local competition between relatives (relatively global competition).