Why a separate DAC?

An upgrade is only worthwhile if it actually is an improvement. Problem is that the medium itself is intrinsically flawed. Garbage in gives garbage out as the old saying puts it. 

An external DAC might be an upgrade or it might not. I'd recommend choosing an external DAC with a multibit (sometimes called R2R) chip and substantial power supplies, preferably one free of opamps in the audio chain.

What model of Burr Brown chip does it have? There are tons of really good DACs on the market in the $1000 range. But if your Yamaha's existing BB chip is good, then you may not notice too much a difference.

Wow, a lot of sincere advice given. I would agree with some but find that I think differently from several points in the previous responses. In my opinion,

• There is nothing wrong with digital (at least nothing worse than is wrong with analog). The medium is fine for listening to music.
  
• The brand or type of chip in the device doesn't matter as much as the overall quality of engineering.
  

One thing I do agree with is that you can't know if a given DAC will be an improvement until you try it.  This is an area where auditions count for a lot.

In your price range, the Audiolab MDAC+ has gotten good reviews and (if you are in the USA) is available by mail order with return privileges. I have not heard it myself.