Hi @Steve Rickard ,
For the first issue, as you mentioned, the dynamic distribution list works fine for all MailContact types but doesn't work for guest users. While per my test, the dynamic 365 groups can include the guest users but doesn't include mail contacts. Given this situation, I'd suggest considering creating one Dynamic distribution list as you have already done, and then create one dynamic 365 group based on the same rule (have the same value in the "Department" field). So when you need to send messages, you can add both the dynamic distribution list and the dynamic 365 group into the recipients field.
As regards to the second issue, as far as I know, this is by design so you may have to add the guest user as a mail contact beforehand if you need to include them in the Approved list under Delivery Management of a distribution list.
With the above being said, I just tried submitting this via the dedicated feedback portal for Exchange Online. I'll leave the link below so that you or others who see this thread can also add vote or comment there:
https://feedbackportal.microsoft.com/feedback/idea/12107cc1-7c7f-ed11-a81b-6045bdaf6a9e
If the answer is helpful, please click "Accept Answer" and kindly upvote it. If you have extra questions about this answer, please click "Comment".
Note: Please follow the steps in our documentation to enable e-mail notifications if you want to receive the related email notification for this thread.