I’m southern and it works either way.

No, but it often holds that connotation even if it isn’t meant that way.

I always think of the ugly baby example. “Oh my – he’s a blessing from God!” And as the mother walks away, “Bless his little heart!”

I have an acquaintance from the Deep South (like just-off-the-coast-of-Alabama deep) who tells me that it always is meant in the ironic way. But I don’t doubt @chyna for a second. I’m sure that she’s right; my acquaintance can’t speak for everybody.

Both ways. Told only by context and tone.

The phrase might sometimes mean what it says on the surface, but it is typically used in the ironic way. It’s not like “That person is stupid,” but it rather means “Thank god I’m not like this person.”

Example: Friend comes in and says “I scraped the snow off of your car while I did mine.” I say “Well bless your heart, thank you!” Sincere.
Co-worker shows me a picture of her 3 month old son. He has the biggest nose I have ever seen on a human. Not within her hearing range I say “Bless his heart, I hope he grows into that nose.” Less sincere.

Virginians use it sincerely just as often as they use it ironically, bless their hearts.

This is a southern saying? I had no idea. I’ve heard it my entire adult life here in Illinois. I’m pretty sure I even heard it when I was growing up in Las Vegas. I’ve used it both ways, as @chyna explained.

Thanks, everyone. I was afraid I might use this expression and inadvertently come across as snarky to a Southerner.

@SavoirFaire confirmed.