I have a hub dynamo, albeit from the 1950s, but still going strong. Allegedly hub dynamos have improved since then, there are some expensive European made models that people swear by, there are also some affordable Shimano units that work rather well and can be bought built into a wheel for around the £100 mark.
I would be tempted by the Shimano units because Shimano have put some effort into this product line in recent times and they have tried to widen the market with better prices than their rivals have been charging.
Your local LBS will be able to build up a wheel for you, you can also get something mail-order.
The USB charge kit that you already have is quite innovative in that it has an extra box to smooth the power out into 5V DC (the dynamo typically gives out anything between 0 and >6V AC).
Therefore, you must plug the new dynamo into the USB doo-dad that you already have (or put together a smoothing capacitor with voltage regulator circuit).
Failure to smooth and cap at 5V could be damaging to your iPod although I expect that it probably could charge fine on 6V with no problems. (6V is the standard voltage for bicycle dynamos).
As well as the hub dynamo I have had the bottom-bracket mount dynamo and plenty of the sidewall 'bottle' dynamos. The 'bottle' dynamos are noisy, but at night, for lights I think that is a fair payoff. For what you are trying to do the hub dynamo is definitely the way to go - completely silent, exceptionally efficient and useful for lights as well as iPod gadget.
My 1950's hub dynamo is going strong - an investment of £100 - £200 will be forgotten in time and you will have much enjoyment from having electrical power on your bicycle.
For anyone wanting to put together a charging circuit of their own, here is an 'instructables circuit':
The parts should cost < £5