...when I check on my iPhone what DNS it hands out, it shows
What you are seeing is completely normal.
To verify this, I setup Internet Sharing over WiFi with my Ethernet adapter as my primary connection and got the exact same results you did (the IP addresses varied some, but it's irrelevant).
I even tried it on a Windows Phone - here's the screenshot of the settings the phone got from my iMac:
When you enable Internet Sharing, it turns your Mac into a DHCP server and DNS forwarder - basically, it turns into a router along with NAT and firewall services to boot.
The IP address that you are seeing - 192.168.2.1 - is the bridge interface on your Mac. It's what bridges the connection between the Wireless LAN you set up in Internet Sharing and your physical Ethernet adapter.
ifconfig in Terminal brings up the following:
en0: flags=8963<UP,BROADCAST,SMART,RUNNING,PROMISC,SIMPLEX,MULTICAST> mtu 1500
inet6 fe80::aa20:66ff:fe39:2c1c%en0 prefixlen 64 scopeid 0x4
inet 192.168.10.100 netmask 0xffffff00 broadcast 192.168.10.255
media: autoselect (1000baseT <full-duplex,flow-control,energy-efficient-ethernet>)
en1: flags=8963<UP,BROADCAST,SMART,RUNNING,PROMISC,SIMPLEX,MULTICAST> mtu 1500
inet6 fe80::8e2d:aaff:fe3a:ec83%en1 prefixlen 64 scopeid 0x5
inet 169.254.89.94 netmask 0xffff0000 broadcast 169.254.255.255
bridge100: flags=8863<UP,BROADCAST,SMART,RUNNING,SIMPLEX,MULTICAST> mtu 1500
inet 192.168.2.1 netmask 0xffffff00 broadcast 192.168.2.255
inet6 fe80::a820:66ff:fe93:de64%bridge100 prefixlen 64 scopeid 0xc
id 0:0:0:0:0:0 priority 0 hellotime 0 fwddelay 0
maxage 0 holdcnt 0 proto stp maxaddr 100 timeout 1200
root id 0:0:0:0:0:0 priority 0 ifcost 0 port 0
ipfilter disabled flags 0x2
member: en1 flags=3<LEARNING,DISCOVER>
ifmaxaddr 0 port 5 priority 0 path cost 0
If you notice, there is now a bridge100. This is a virtual interface that was created on the WLAN adapter. If you execute that command in your Terminal, you should get something similar.
As for your DNS, what is happening is that your phone/tablet will send the DNS request to your Mac, and then your Mac will take that request and send it to the DNS hosts you have listed. When the response comes back, your Mac will pass it along to the wireless client that made the request.
I also tested browsing the Internet and fetching mail - all worked with no problem. I am running El Capitan 10.10.5
Are you having that problem now?