"It looks like Liverpool will finish two spots higher in the league than they did last season, and if they manage to do that again next year then they will be champions," said Dalglish, who also led Liverpool to the title in 1986 and 1988.
"They are definitely moving in the right direction and although I am not sure whether they will manage to win the league, Liverpool can certainly compete with anybody on the pitch.
"I am sure Rafael Benitez will make some more signings in the summer and that will only make them stronger.
"I think Rafael has been brilliant for Liverpool and he concentrates solely on the football side of the club which is the most important thing.
"He is only worried about preparing his players for the next match and he lets them get on with their job, so you can't have anything other than admiration for him."