If someone links to you in their blog, you should be grateful for their SEO because some people are stingy with their links out. That's the other half. SEO prefers sites that aren't afraid to link to another site, especially one closely tied to your main key-words. For instance, if you blog about being a parent, links to other parenting sites rank you better in Google Search than if you don't link at all. It means you are a parenting site just like all the sites you link to. And you want to use a key-word to link to that site as opposed to "click here for..." or "read this." For instance, I can type any sentence containing the word graphic elements to link you to a blog post about graphic elements.
1. Link to Friends and their blogs or businesses.
If you are a friend of mine, or if I read your blog enough to like you, I will link to you, frequently. Nobody really cares nor appreciates it, but someday, maybe they'll get enough traffic to their site from mine that they will, and I'll be like, "that's because I love you."
2. Link to Information.
If I write, which I do rarely, about something factual as opposed to thoughts floating around my head, I will link to my "bibliography had this been a paper for school." This one is beyond the SEO. This one you want to do so you don't plagiarize. If any idea you use you got from somewhere else, even if just inspired, link to that source somewhere. Not only do intelligent people like to consider the source and see it for themselves, but the source deserves a little link for inspiring you. It's just a common decency. I see a lot of bloggers taking this one for granted. They feel they are "copying" by providing their source when really, not providing it is "copying." Clueless people are clueless.
Some of the main blogs I link to, whether it's on the sidebar of my blog or an example in a blog post on this blog, I link to them because their overall style inspires me. What I call the Unholy Trinity of Bloggers, Insane in the Mom Brain, Moms Who Drink and Swear, and The Bloggess, all 3 of them inspire me profusely. I read them in particular when I have writer's block. I'm forever grateful to them for making me want to write and pay attention to what I write.
3. Link to Similar Sites
Are you a mom blogger? You should be linking to sites of mom bloggers, parenting sites, baby centers, anything associated to your blog. Do you blog recipes a lot? Link to food related sites, whether it's a recipe site or a nutrition site.
Remember Google doesn't have any emotions. They don't care that you want to hoard all the internet traffic to yourself, that the main point is to get people to stay on your site as opposed to hopping somewhere else. All they know is the INTERweb is INTER-connected, and they want to keep it that way.
4. Link to Your Own Site
Anytime you can get away with linking to an old post, do it. It helps keep people engaged on your site, and it helps them navigate through your site. In addition, it's good SEO. Just don't overdo it.
If you have multiple sites, don't be afraid to link to those too. For example, Crumpets and Bollocks is my other blog and many times, I have linked to another blog within that blog for other reasons than SEO. For instance, I have a religious point I want to make, so I made it on my religious blog. When I referred to that point in my secular blog, I just linked to the religious one.
5. Link in a New Window
You want traffic to remain on your site. Linking to other sites is great, just make sure you do it in a new window keeping your site up on the to-read list.
The html for such a thing is to do the target = blank code. Here's an example from w3schools.
<a href="http://www.w3schools.com" target="_blank">Visit W3Schools</a>
You probably don't want to copy and paste that. You'll have to retype it because most blogs change the symbols a bit. In Blogger or Wordpress, you can link in a new window by checking the option "open in a new window," when inserting a link.
Linking to and away from your site is important SEO, and just ethical practice. They say you should have at least 2 to 3 links in every blog post. They should be spaced out. And they should use a RELEVANT key-word.