Yes, the sentence is correct. However, it can be made a bit clearer by combining the two statements: "This dress is small; I wear size M."

While not grammatically wrong, it’s unclear and a little unnatural. Possibilities: This dress is a small. I wear a medium. (You know that this dress won’t fit you because it’s the wrong size.) This dress is small. I wear a medium. (You are trying on (or tried on) a dress and it is too small. You think that maybe it was the wrong size and you are giving the size you usually wear)

Those are actually two sentences. The grammar is fine.