The Spaniard, who guided the Reds to Champions League victory in 2005, takes his Newcastle side to Merseyside on Saturday.
It will be his second return after earning a 2-2 draw as interim Chelsea boss in April 2013.
"Rafa will be welcomed back with open arms and rightly so," said Dalglish.
"The Liverpool supporters have a reputation for paying tribute to anyone who has made a positive contribution to the club and I've no doubt it will be no different on this occasion."
Dalglish, who himself is revered at Anfield, believes the club have plenty to thank Benitez for and it is not just that Istanbul triumph almost 11 years ago.
Benitez restructured the club off the field, taking a vested interest in the club's development of young players, and Dalglish believes current boss Jurgen Klopp is benefiting from that now.
"It isn't just about the trophies that Rafa won as Liverpool manager, although they are testament enough to the service he provided to the club, it is also about his legacy and we're still reaping the rewards of that today," added the Scot.
"I was fortunate enough that Rafa invited me to help out at the academy in whatever way I could and I will always be eternally grateful for that.
"The benefits of the changes he put in place at that time are still being seen, you only have to look at some of the players in the first team squad to recognise that.
"Sheyi Ojo, Jordon Ibe and Jerome Sinclair were both brought in at that time while others including Jon Flanagan, Connor Randall, Ryan Kent, Cameron Brannagan, Ryan Kent and Jordan Rossiter had the benefit of working with the staff that Rafa put in place.
"All of those players have played for Liverpool's first team this season having been given opportunities by Jurgen Klopp and I am sure that Jurgen will appreciate the contribution that Rafa made in that respect.
"The staff that Rafa brought into the Academy, especially Frank McParland, Rodolfo Borrell and Pep Segura, all made a positive difference and the work that they put in is bearing fruit and I'm sure it will continue to do so.
"So Rafa can rightly be proud of his contribution to Liverpool and I've no doubt he will be given the kind of welcome he deserves tomorrow."