The dynamic resistance does dissipate heat, as does the current flowing through the 'fixed' V in series with it.
Imagine a diode with 1 mA, and 0.726 V. this is 726 uW total power. The small signal dynamic equivalent model is 700 mV in series with a 26 ohm resistor.
The power is 1 mA * 700 mV + 1mA^2 * 26 ohm = 700uW + 26 uW = 726 uW -- same as before.
This model remains valid for small excursions around 1 mA (e.g. 0.1 mA). Changing the current to 1.1 mA increases power to 1.1 mA * 700 mV + 1.1mA^2*26 = 770u+31.5u = 801.5 uW.
Now, I know that the voltage on a diode increases by about 2.6 mV when the current increases by 10 % (from the exponential behavior). Therefore, the 726 mV increases to 728.6 mV. 1.1 mA in 728.6 mV is also 801.5 uW (basically because of the same reason that 10 % gives 2.6 mV).
Recombination of electrons and holes does dissipate heat, just as separating them across a potential barrier does. While separated, the energy stored in them is similar in nature to the energy stored in a capacitor (although there are complications analogous to the small-signal resistance with the capacitor also; not least of which is that the capacitance is not constant with voltage).