I’ll jump in here, since no one else has. So you have purchased a Denon A/V receiver with the iPod dock, okay. I am reasonably sure the Denon does not accept digital signals from an iPod cable (and that’s the only way digital is output from an iPod). There are only a handful of brands that have that ability. So digital from the iPod is a moot point, you will only get the standard line-out from the cable to the dock. If the Denon does indeed do digital from an iPod, that’s the way to connect it. Without extra components (eg. Better dock or DAC), that’s as good as you will get from the iPod.
As far as the root question, digital vs. component. Now I assume you mean the 5.1 analog inputs, because component is for video only, as in RGB, one cable for each color. If you do mean the video (eg. HDMI or the 3 color cables), the standards and industry folks are making your choice, HDMI will be the only option shortly, for video anyway. If on the other hand, you indeed mean 5.1 audio, well that’s a sticky one. If you plan on using the DAC in the Denon (not sure which one you bought) and your source is a directly connected mid-range type disc player, at this same price-point, I would worry more about convenience than detecting better sound. After all, one digital cable is much easier than half a dozen analog cables, eh? A lot depends on the quality of the source signals, so if your using a higher end player with an outboard DAC, then use the stereo analog (no 5.1 here), but in either case the Denon’s amplifier section will be a limiting factor. No offense intended, I use a Yamaha A/V for a lot of listening myself.
Oh, USB inputs are super convenient, but will probably not be of the jitter reducing asynchronous variety. Are they even putting those on receivers now? I know my Oppo disc player can play audio and video files from a drive. Either way, your back again to which DAC is better, in this case, the iPod’s (analog line-out) or the Denon’s. Plus, I don’t think the iPod can connect to a normal USB without it’s required dock, which kills the digital out? (Need an iPod user’s input here, I use a Cowon D2).
Anyhoo, I would be thinking which is easier to setup and use. If you start getting higher end sources, then worry about the connections. Happy listening!