Just like any separate component set-up, you can yield great results. Just picture the size of the circuitry of a DAC in a portable CDP or DAP, compared to what can be done in a separate case that is DAC exclusive. Separate power supplies and larger components and perhaps filtering circuitry.
If you have a high-end player, like a Meridian, or a Krell or a Wadia, chances are, the DAC included inside is going to be of superior quality and a Micro DAC or a DAC1 is probably not going to be competitive.
But if you have a cheaper $300 Sony or Panasonic CDP, and use the digital out, to a DAC1 or a Bel Canto, the benefits should be huge.
The problem with the portables, is that there are very few with a bypass circuit that allows for a digital out. IRiver made one a couple of models ago, but their newer units and others like the Ipods, don't offer that option.
Use the receiver analogy. Except for a few exceptions, getting a separate amp, pre-amp, and tuner, is going to blow away, an all in one stereo receiver.
Things like isolated and unshared power supplies, lack of RFI floating from AC to DC components all are examples to helping audio Nirvana.
Using a separate transport and DAC instead of a 1 box CD player, allows you to have the transport concentrate on just spinning the disc and reading it, and the vibrations and transformer noise won't affect the electronics in the DAC, allowing the DAC do a better job to convert the digital to analog signals. Also, the size of the separate boxes allows for larger better componentry and paths, and not to have electronics on top of each other.
This is not to say that all DACS are good, just because they are a separate unit. You need to read the reviews, and follow impressions, and do your own listening sessions.
But separate components are the way to go, if you want better sound and upgrades.