Are the files in an encrypted dmg actually in plain text on the hard disk
The files on an encrypted disk image are encrypted. 

As you can see currently you can have 128 bit AES and 256 bit AES.  As is pointed out 256 bit will be slower but more secure, however both methods will leave your data encrypted, until it is decrypted.



The real issue is how strong the password for the encrypted volume is.  If the password is not a random string of characters, but based on a dictionary word with substitutions of 1 for i etc, the files while encrypted might as well not be.



Ensure your password is based on a long sentence where you use all punctuation marks, include spaces, numbers and special characters.