Yes, there is ferry service between Iceland (leaves from Seydisfjordur on the East coast) and the Faroes and between the Faroes and the Shetlands (also goes on to Germany, I think). It's pretty expensive, but, like I said, it's a dream.

We took Icelandair from Baltimore to Keflavik (30 min. from Reykjavik) and it's about a 5 hour flight on a lovely airline.

Hope this helps, Susan Maryland