How does the drag compare with more expensive hubs? (I'm going to angst about drag).
I have a couple of of Shimano dynohubs (Alfine and 3N80). Even with the lights on, the drag is so miniscule that I don't bother turning the lights off even on daytime group road rides. Yes, I'm taking pulls with my dyno on. It just isn't a big deal IRL. If you're thinking about a Shimano, for a road bike, I think the DH-3N80 is the one to get, it's 190 grams lighter than my Alfine, which is a monster at 680 grams w/out skewer.
What lights should I consider?
If you ride on dark roads and highways at road-bike speeds, and want to see stuff at a decent range so you can avoid it, I think the Cyo 60-lux versions are the ones to look at, or the Edelux if you can afford one. I use the base model Cyo 60-lux design (no DRLs, no auto-on/off sensor).
BTW, I am presently using a Magicshine for my after work sunset and evening rides, which is very bright and gives me good deal of both "seeing" and "being seen" confidence. How do the dyno powered lights compare in brightness?
I think you'll find the dyno lights are not as bright in absolute terms, and will get washed out more easily in urban conditions as a result. In the "showcase" environment of a dark highway, however, the well-designed beam of a light like the Cyo or Edelux should prove to be very effective. I'd still like a super-Cyo with twice the actual lumens; I guess I could run a dual-Cyo setup if it came down to it.
The "be seen" capabilities of the MagicShine will easily top the Cyo. For one thing, it stays running at full power when you're stopped. Also, it doesn't cut the beam off, there's ample light above the horizon. In city traffic, this is a good thing. On a dark highway or MUP, not so much.