Which faction poses the greatest challenge for the Dwarves?

"Word" deals decent damage (and the total damage is quite good – after all, dwarves don't have the worst magic stat). As for "Divine Retribution," it's a single-target spell, and, as you correctly pointed out, it has a good chance of simply encountering magic resistance (by the way, "Barbarian Luck" has an uncorrected bug to this day, so I wouldn't recommend taking it).