Personally I am using PhotoShop CS5 Extended 64 bit, with the latest Nvidia plugins. With the appropriate plugins, Gimp and Paint.net support as well the dds format, though I think I've read somewhere that their management of alpha channels is not as intuitive as the one of Photoshop. I can be wrong anyway, as I am not a regular user of those programs.
As for dds settings, I use:
DXT5 ARGB 8 bpp | interpolated alpha
Generate Mipmap
There is another program I use for viewing compression settings of existing dds files. It is called
The Compressonator. It got limited editing options, but it comes handy when you want to view the compression type of stock dds files, if you want to keep the same settings for your custom textures.
Indeed you might want to change those settings, since the use of not perfectly optimized textures in stock SH5 is suspected to be one of the reasons of its bad performances and low fps.
I hope I replied to your question. Don't exitate to ask for further support, if you need it!