There are three things to take care of if you want to improve the sound of the internal DAC, because the ND5SX is very sensitive to the quality of electrical inputs it has: the ethernet input and the power.
The WiFi is ‘noisy’, you better use the ethernet (wired) connection.
Put a switch in between the router and the ND5XS. For instance a DLink DGS-108 or a NetgearGS108E.
Buy good quality Cat6 ethernet cable. For instance: CatSnake from DesignACable if your are in the UK or Blue Jean Cables on Amazon. Nothing fancy needed, just something that complies with the specs. (Cat6 or higher is a shielded cable. It is about the shielding, not the speed).
Upgrading the power supply of the switch has impact too, but both the DLink and the Netgear have good (read: clean) power supplies.
It is ill advised most of the time to use a filtered power strip with Naim gear, but the streamer (NOT the amplifier!) benefits greatly from a filtered power strip. From a simple Supra to insanely expensive, the choice is yours.
Replace the provided power cable with a better one. Naim sells their own upgrades (not cheap), but something from a brand like IsoTek or Supra is fine too. The trick is the shielding of the cable: both preventing the cable to impact interlinks or speaker cable crossing nearby and from the outside in on the power cable.
If you play local digital files through UPnP, make sure you use a UPnP server like Asset UPnP or Minim where you can set the UPnP server to ‘transcode’ the files to WAV. Feeding the ND5SX with a preprocessed WAV puts less stress on the compute power in the streamer and results in a better sonic quality overall. This is true for all first generation Naim streamers (and recommended by Naim).
If you do this, the sound coming form the ND5XS is great and different than a lot of modern DACs.
Even if you decide to go for an external DAC, above measures help with getting the streaming part to feed the external DAC with as clean a signal as possible. It’s “audio hygiene”.
Hi, an external DAC is a popular upgrade for all separate Naim streamers. An alternative is a power supply upgrade. They are, of course, entirely optional, and it’s fine to use the built in DAC too.
There’s no harm in trying the ND5 DAC with your CD player, but my guess is that it would be better used with its own DAC.
My choice would be to look for a used Naim NDAC or Chord Hugo or Qutest. These could be used to upgrade both the streamer and the CD player.
I had an ND5XS and it is very good on its own. I did upgrade it with an external Teddy Pardo DAC. This made it sound alot better still. People on here rave about the NDac and the Qutest. Either would be excellent.
In answer to your 2nd question I would leave your CD5XS as is unless you are going for a different DAC then you can try your new DAC on the CD5XS.
If you can get an Ndac would be my choice in retrospect. You’ll keep the Naim signature sound and the black boxes will look unified.
I posted this in response to a similar query a while back, repeating here in case it is of use:
The ND5XS is a good basic streamer, with a sound quality broadly commensurate with its cost, though I found it could be significantly improved adding a Chord Hugo external DAC, costing less than the Naim suggested XP5XS power supply (and much more significant improvement). By basic I mean for streaming of one’s own stored files - I have no idea how well it might do with online streaming as I never tried. After relegating it to rendering duties it wasn’t long before I found a cheaper better alternative, though a bit more fiddly: the ND5XS I found very easy to set up and yse.
I prefer R2R (ladder) and especially NOS (non-oversampling) DACs. Holo Audio, Denafrips, Rockna are great R2R (ladder) DAC:s. Holo is a NOS-DAC, they tend to present everything in a more natural context compared to, say, a Chord Dave which to my ears overdid the details. But it comes down to what you like. R2R DAC:s are often more expensive. A good lower-cost one is the Denafrips Ares II or Ares 12th.
Instead of external dac, try to exchange it for the xs2 streamer. At my dealer you can exchange old for new and prices are decent. The xs2 uses the stream unlimited logik (i think) and is much more capable.
The direct answer to your question is that, no, you do not need an external DAC. However, using one might improve sound quality for you.
First, though, it’s worth noting that the streaming technology in your ND5XS was primarily designed to play music files stored on your network. It does offer some limited support for external streams, but if, say, you wanted to play music from Qobuz or high resolution stuff from Tidal, that wouldn’t be possible at least without some sort of workaround. Trading it in for a ND5XS2, as @randomfan suggests would solve those problems and may well improve sound quality, too.
As to adding an external DAC, opinions and preferences vary. Some rave about Chord, others prefer different DAC technologies or even Naim’s own nDAC. If at all possible, try to hear some options before purchase. Regarding the nDAC, my first Naim system was CD5XS with Nait XS. I bought an nDAC when it came out and the improvement in sound quality was substantial. One dealer posted on the forum that the CD5XS/nDAC combination improved on the next level player: CDX2. It uses XS-sized casework, too, so a nice visual match with your existing kit, if that matters.