For the increasingly prosperous industrial dairy sector of powder production from milk and whey, the efficient utilization of differently composed products has become a major topic of concern. Although a proper rehydration behavior is crucial for the application of dairy powders, it is also essential for producers to achieve safe and green processing. Physical means of processing to improve partially poor rehydration properties are preferred by consumers over often suggested chemical means, which also alter product composition and further functionality. This review provides an overview of the rehydration properties of various types of dairy powders and details on the impact of compositional (e.g., protein, fat, and lactose) or structural (e.g., particle size, morphology, and porosity) powder characteristics. Then, the mechanisms and effects of various physical processing approaches on the improvement of rehydration properties of dairy powders are described following the sequential order of pre-dehydration, during dehydration as the main processing step, and post-dehydration. The information provided will support advances in dairy ingredient research and the development of technology for clean-label compliant nutritional powders that can be used in a variety of industrial applications.