That is a great question. I think many people have many thoughts on this but at some point, your child will eventually need to remember which phonogram makes which phonetic sound for each word. For example, there are several ways to spell the long a. You can spell it with a_e (silent e at the end), ai, ay, or eight (and there may one more). "A" also makes other sounds. It says "u" at the beginning of the word (again) or I can say "u" through out (banana). I can also just say it's short sound or its long sound. Phonics can be confusing LOL.
So I share all of this to say, I think if he is catching on to hearing the phonics, that is great! It will help him when he goes further. I would definitely encourage that. And he will be able to see and hear it action as as many of words in the word lists have similar types of words each week. However, even with phonics based spelling programs, eventually, kids have to memorize which words are spelled how. I only say this because my oldest is dyslexic and my son has auditory processing disorder. Both at this point still use a dyslexic spelling program (my son is using a dyslexic reading program this year too as those programs work very well for APD children). My oldest is now at a point where she is memorize words that are spelled with certain sounds just like you would memorize dictation. And she has sentences that she uses to memorize as well. She has more activities she does for spelling than you would do with dictation but she really needs them.
I personally do think that dictation is a great way to learn to spell. Eventually each of my kids will switch to dictation because I think it is very important to be able to visualize a word in context. I was thinking about switching my oldest this year but she still had a few things I thought she needed to learn so she will switch next year. As for my son, he probably won't switch for a few years because he still has a lot of things he needs to work through before he is ready to visualize anything. My youngest, she just does spelling with her brother because she can and this helps cut down on my teaching time

. I know my answer is not very CM and that I have 2 kids with special learning needs but I think your son will do great with the lists even if this year he is saying it out loud and sounding it out. He is still burning those sounds into his mind to associate with that word.