As far as I know, DDS files are only used by UE4 as Cubemap textures, I have had difficulty importing regular dds textures as well in the past, and gave up on it. The easiest way to get around would be to download the DDS Photoshop Plugin from Nvidia (there is one for Gimp as well), open the file, then save as a tga or png.
Here is the DDS Tools:
With installed you can open/save in DDS format in Photoshop. Hope that helps! 