Dreamwidth's rich text editor is notoriously funky... I've had a lot of issues with it in the past >:T If you're comfortable with some basic html, I definitely recommend using the html post editor over the rich text one. It's a lot more reliable and gives you a lot more control over how your posts turn out.

It looks like you do have to highlight the text you want under the cut, but like meridan_rose said, the <cut> tag works wonders. DW's FAQ entry on cuts is pretty informative!