Connecting to machine names directly can also be seen as bad practice so connecting via DNS is always a good idea. I've connected to SQL instances using DNS in the past without any issues. Given its a standard SQLConnection under the hood I cannot see any problems. There certainly isn't anything specific in an EPiServer install that would mean it isn't possible.

So my advice would be that there should be no issues (subject to reliable DNS of course) but its always worth checking.