Dynamesh by nature doesn’t attempt to smooth the model. It’s main goal is to preserve the existing surface shape, so if you dynamesh a low-poly model then it’s going to try and maintain all those polygonal planes even though the new geometry will be denser. You might get some smoothness if you turn on polish and / or crank the blur setting. Otherwise, you’ll want to subdivide the model a few times before doing the dynamesh operation.
That said, there’s probably little point in dynameshing the model you’ve shown as it already has a nice edgeflow for subdividing and sculpting. If you’re looking to make it smoother or add more polygons for detail, you could just subdivide it instead.
Dynameshing is good for creating basemeshes and can come in handy when you start to pull entire new forms out of a model (like wings, horns, and extra limbs), but when you have the main silhouette down I find it best to stick with regular subdivision levels instead.