Unfortunately the last time a member did a full comparison of the best Word compatible apps was almost two years ago. It has also been about that long since I saw a detailed blog or news article on the subject. Though the one that Giradman linked isn't too bad if you take note of the relative scores and follow the linked articles.
Personally, also use Pages. For end to end creation of a document you won't find anything better on the iPad; however some of the other apps are somewhat more compatible with MS Office (though hardly 100%), and have direct DropBox support.
For an absolutely free, basic word processor you can use Google Drive. It does not have direct DropBox access, but it is it's own cloud based solution, and whatever you create on the iPad can be enhanced by the more complete toolset available on the desktop version. This may fit your needs best.
The only 100% compatible MS Office solution available are from CloudOn and OnLive. These run a basic MS Office suite on a remote computer. File are transferee on and off the servers via DropBox. However, they can not be used without an internet connection, a good one, and the UI is a touchified desktop, far form ideal.