He's certainly better than Cahill, Jagielka and co. He also has a leadership streak, unlike those chinless wonders.
The most logical explanation I can come up with is that Hodgson's got a bet on that England will field an all ex-Sheffield United backline during the world cup, and getting the nation to accept Naughton at LB is the final piece in his masterplan.
It's sad for Dawson, but selfishly I'd rather get another two seasons out of him in club football, than waste his time/energies with that hopeless bunch.