Is my action of rejecting a suitor based on a dream and repeated istikharah that resulted in hearing unfavorable things about his character correct, especially after I felt distressed by his engagement to another?

The correct approach is not to rely on a dream after performing الاستخارة (istikharah - prayer for guidance). The preponderant view is that the person who performs istikharah proceeds with the matter and does not abandon it unless Allah diverts them from it. There is no mention in the hadith that Allah creates in the heart of the person who performs istikharah a feeling of contentment towards one side or an inclination towards it after the istikharah. Similarly, there is no mention in it that the person performing istikharah sees a dream or hears a voice. In fact, one might not feel contentment even after repeating it, and this strengthens the view that the matter is not dependent on a feeling of contentment. Since the suitor has withdrawn, entrust your affairs to your Lord and have good expectations of Him.