Android - Why doesn't my android start daydreaming?

As mentioned in comments, I also have a Nexus 4 (4.2.2) and it daydreams OK when charging (USB to wall charger) when set to sleep after 15 seconds.

"Daydreaming" is triggered when the device goes to sleep (or when sleep mode would normally be triggered). It would seem that if the "stay awake" option is checked in "Developer options" then sleep mode is never triggered and the device never daydreams. So, the solution is to uncheck the "stay awake" option.

"Daydream" is like a conditional stay-awake option. The screen does not switch off and for this reason a device can only be set to daydream when it is connected to a power source.

Daydream doesn't trigger if Phone is switched off by button.