I wonder why the psychologist says your dd has dyslexia? Your description of her reading makes me wonder.
It seems to me that if she's reading the Littlest Pet Shop books, which you say is a grade or so above her, she's a good reader for her age. Also, not recognizing a word in a book, when she can read it on a flashcard isn't typical-- it's usually the other way around. Kids with dyslexia use context to help figure out words that they can't read in isolation. What other signs of dyslexia does she have? Does she struggle with fluency? Is she a hesitant reader and does it sound like she's seeing each word for the first time? Can she sound out? Again, dyslexic kids often can't.
As for read alouds, regardless of whether she's dyslexic, I'm sure she comprehends far above what she can read. Go for good, complex literature. My kids loved Raul Dahl, Magic Treehouse, and other chapter books sprinkled with pictures when they were 6.
