I have just done it last week, and yes, the dual-boot is a safe way to establish a smooth transition, and try Vista before you decide to fully migrate.
I did it on a separate physical drive, and I would strongly recommend doing the same. Partitioning the System Drive might not be successful, and you might loose the entire original XP installation.
Might as well get a 160GB drive for $50 w/ Free Shipping like this
Seagate
Just start the installation, and you don't have to enter the Activation Number during installation, so you can test it for 30 days, and activate it when you are comfortable with your setup. I had used it since last Thursday, and activated it last night, being VERY happy with the results, especially gaming. It is actually faster and smoother!
You will be able to access files on the XP drive after changing permissions in Vista, but I would recommend the full back-up to the External Hard Drive (including the Internet Explorer Favorites) to make it even easier, and also to be safe in case something goes awry.
If you do decide to partition your system drive, give the Vista partition as much space as you can. I use
Disk Director, but you can google for the alternate methods.
Good luck!