I haven't done it myself, but my kids went through a stage where every time they went to a festival they wanted their face painted. It probably isn't great for the skin, but they would only have it on for a couple of hours two or three times a year so I don't think it would do much harm.
I face paint my son and my friends kids as a bit of a hobby . As long as you use kid safe face paint then you're pretty safe. There are a number of good makes for facepainting and these are safe for young sensitive skin. The facepaints to watch out for are the cheap ones in crayon form from the $2 shop etc, which have not gone through the same safety checks. I do find that too much facepaint (e.g. an all over design) can dry the skin, so a good kids moisturiser after you have washed it off is a good idea