Seems like that's already enabled, otherwise even the default icon with initials wouldn't show up.Settings. Messages. Turn on 'use photo image'. Done
Correct, It is not consistent. After the posting of this thread I changed the image of two contacts on my iPhone. The changes showed, then went away after a few seconds. They do not show in messages, or contacts on my iPhone. On my iMac, however, they both show up in the messages.app and the contact card....I've had this problem intermittently as well, haven't been able to figure out a pattern yet but I'll see many contact photos yet one or two will not come through. To make this more confusing it is sometimes inconsistent across devices (e.g. will show up on my phone but not on OS X even though the contact is iCloud synched and the image shows in the contacts application).