The problem is the CPU in your laptop isn't fast enough to handle the on-the-fly DSD256 or DSD512 conversion as it's a 5 year old dual core Intel Core i7 6600U. Even though it's an i7, it's an old and weaker i7 with only two cores and four threads with a base clock of 2.6 GHz and a boost clock of 3.4 GHz. DSD resource utilization was actually slightly improved in Media Center 27, but if you're converting to DSD256 or DSD512 with a dual core CPU you're still going to have issues with the system being able to keep up with the on-the-fly conversion. As mentioned, dropouts when doing those DSD conversions are usually indicative of the CPU not being fast enough to be able to handle the on-the-fly conversion, which when converting to DSD256 makes things much, much more complicated requiring a more powerful, faster CPU. DSD512? The CPU needs to be as fast as possible, remember with increase in DSD quality (from DSD64 to DSD128 to DSD256 to DSD512) the CPU speed requirements increase even more. DSD512 has a higher CPU speed requirement than DSD256 does.
The 22% CPU utilization tells me the on-the-fly DSD conversion is using a single thread - one of the four threads your CPU has. This is to be expected when doing any sort of conversions like this, including DSD conversions. Typically what happens in Media Center and other apps that do conversions like this (like dBpoweramp) is that each single file conversion usually takes a single thread. For example with my 6 core CPU with 12 threads, it can convert up to 12 files at once, one file conversion per thread. I don't think this is a process where multiple threads (or worse, multiple cores) can be used for converting a single file, as this is probably a bad idea in the making, assuming it's even possible in the first place (which I have my doubts it is). Think of it this way, it's a bottleneck. Your CPU can't do the DSD256 conversion fast enough while the file is playing (and MC is actively doing the conversion), so you encounter dropouts. This isn't a Media Center issue, as it's already optimized for conversions like this and there's nothing more that can really be done in the app to 'speed' it along any further, as it's likely as optimized as it can be now. The limiting factor when doing conversions like this is always going to be how fast your hardware, especially CPU, is.
And ultimately, that's exactly what it's going to boil down to, how fast your CPU is. The faster the CPU clocks are, the better your single threaded performance will be doing on-the-fly DSD conversions in Media Center for higher quality DSD like DSD256. So for your laptop and CPU, the limit of your hardware for the on-the-fly conversions is likely DSD128 (which honestly is impressive, as a lot of older machines can't go past DSD64 on-the-fly conversions) and I don't think there's anything you can do to 'fix' that other than using another, more powerful machine. Or I guess you could pre-convert all your files to DSD256 or DSD512, but honestly that's a waste of storage space.
Try running the benchmark and posting the score here, it's a good way to tell you how powerful the laptop really is.