Hello Aloha4.
Thank you for using Apple Support Communities. It sounds like you're experiencing issues with your Apple Watch microphone. Specifically, it isn't working when attempting to use it for texting. We can understand how this would be an issue. Allow us to investigate this issue and assist in any way we can.
You did a great job in confirming that dictation is enabled. We would like to make some recommended troubleshooting suggestions you should try. First, try restarting both your iPhone and Apple Watch:
How to restart your Apple Watch - Apple Support
Restart your iPhone - Apple Support
Additionally, if you have any pending updates available for both your devices, it would be best to install them. Keeping your device fully updated can help resolve various issues and help with overall performance. The resources below can guide you:
How to back up your iPhone, iPad, and iPod touch - Apple Support
Update your iPhone, iPad, or iPod touch - Apple Support
Update your Apple Watch - Apple Support
If these steps don't work, you can try to unpair your Apple Watch from the iPhone and set it up again:
Unpair and erase your Apple Watch - Apple Support
Set up and pair your Apple Watch with iPhone - Apple Support
We hope this information is useful. Best of luck.