To the kids, they are just fingerpainting. But they're also learning their letters -- as well as the beginning of phonics.
All you need for this project is canvas (or, in this case, paper), and painter's tape. I can't stress enough: use painter's tape. Any other tape will rip.
Then -- let them finger paint over it! I made sure to point out the letter on each paper as I handed them out to the students and explain why they were getting that letter. This is honestly as simple as, "John gets the letter J, because that's the first letter in his name! J for John!"
I suggest removing the tape about 15 minutes after the child is done. Just long enough that the paint is not completely wet, but short enough that the tape doesn't have time to super-adhere to the paper.