Dreamhost, for reasons unknown, does not yet support SMTP over TLS/SSL. Uncheck that box and it should work fine.
Of course, by “fine”, I mean “fine, if you don’t care that your password will be sent over the wire in plain text”. If your ISP offers SMTP over SSL (or doesn’t require SMTP AUTH at all), you should probably continue using their mail server to send mail. That’s what I’m doing.