It sounds to me like Pepper has prostate disease. This is fairly common in intact dogs as they get older, just as it is in human males as they get older.
The prostate can be palpatated in dogs by rectal palpation, and if it is enlarged, that would increase the likelihood that prostate problems are the cause of the bleeding.
There are at least seven forms of prostate disease that can affect dogs, all having slightly different symptoms, but ultimately needing to be diagnosed by x-rays or ultrasound. From your description of Pepper's symptoms, I believe he has the most common form of prostrate disease, which is Benign Prostatic Hypertrophy (BPH).
BPH is an age related increase in the size of the prostate. It is non-cancerous, and does not cause clinical problems, which is why Pepper shows no other symptoms. BPH occurs in almost all intact dogs as they age.
If any symptoms appear, they will be:
- straining to defecate
- bloody discharge from penis
Even if these symptoms occur, the dog will still feel fine.
Diagnosis
- physical exam including rectal exam
- urinanalysis
- cytologic (microscopic) evaluation of prostatic fluid
- abdominal x-rays
- clotting profile
- Abdominal ultrasound
- Possible prostatic aspiration - inserting a syringe into the prostate tissue and obtaining a small sample for biopsy
Treatment
- No treatment needed if the dog is asymptomatic
- Neutering
- Estrogen therapy
- Ketoconazole (Nizoral)
Since you were planning to have Pepper neutered anyway, once you confirmed with tests that an enlarged prostate did cause the bleeding, neutering would eliminate any further problems.
I hope this helps and reassures you that there's nothing serious you need to worry about with Pepper. It's good to know that he isn't feeling sick, either.
http://www.petplace.com/dogs/benign-prostatic-hypertrophy-bph/page1.aspx
http://www.vetinfo.com/dmale.html#Bleeding%20from%20Penis%20%20-%20German%20Shepherd
http://www.sniksnak.com/doghealth/prostate.html