I don't know what the context is, but I imagine that the "it" in your "If you dream it..." refers to some noun clause (that + S + V). And as you showed, "that + S + V" can't be the object of a preposition. A: I really want to study acting and become a famous movie star. B: If you dream it (that you will be an actor), you can do it. The person who says "If you dream it, you can do it." has to know what "it" refers to.

Yes, it's correct. Just think of the difference in meaning and it will be perfectly clear.