There are a few things you will need to remember if you want to cover a Daniel Johnston song, and intend to preserve its Daniel Johnston-ness. First, you'll have to keep your delivery innocent, allowing the song to impart its sweet tragic wisdom on its own. Second, keep the sounds plain. Finally: don't leave out the hope. The lyrics will preserve this along with the wisdom, but still...something like a dire, personally apocalyptic shoegaze number won't do. I suppose it would help to have natural freak-folk tendencies, but not everyone is blessed with those.
Here's a Headless Heroes cover of one of my favorite Daniel Johnston songs, True Love Will Find You In The End (mp3), which always reminds me of his own unrequited love, and his sweet, stubborn hope. The slide guitar and Alela Diane's vocal delivery add something new and right, without compromising the song's integrity.
From Headless Heroes' The Silence of Love, an album of covers, also including Jesus & Mary Chain's Just Like Honey. Stream it here.