The 23-year-old, who has not had an easy time at Anfield since his £35 million move in January 2011, is one of the forwards whose position in the England squad is up in the air, but the Reds boss feels that the striker would come back to to the club a better player if he competes in either the European Championships or the Olympics this summer.
Dalglish told reporters: "Andy will benefit from the fact he has been here for a year and has not had any problems with injuries.
"But the quality in the last couple of games has been fantastic and he has been building up to that for the whole season.
"I'm sure he will come back next season very much encouraged by his performances and starting afresh.
"We don't know what is going to happen with Andy yet - whether he is going to be away with England in the Championships or chosen for the Olympics.
"I am not going to pick either Stuart Pearce's or Roy [Hodgson's] team but if you want to play for your national side - and he does - or the Olympics - and he would do if he was picked - the best way to is to produce the goods on the pitch.
"The players will be judged by the performances and the better they play the more chance they have got."
Scott Parker was chosen as captain by caretaker boss Stuart Pearce in February but Roy Hodgson could decide to give the captaincy to Liverpool skipper Steven Gerrard, an idea with which Dalglish would agree.
"All we can speak about is Steven and his time at Liverpool Football Club and the service he has given us and the way he has led the club many times by example on and off the pitch," the Scot declared.
"He's a real credit to the club. We cannot speak highly enough of Steven but that is our opinion, if someone differs from that then that is up to them.
"I am sure if he was asked [to be captain] he'd be very proud."