We didn't do this in preschool. I honestly do not see a use in word walls with this age group, unless that child is already reading and writing. If you want your students to be exposed to words at this age, I suggest labeling things around the classroom (door, table, wall, window, chalkboard, etc).
I had a word wall in kindergarten. Each week we had a couple "popcorn" words that we would go over. Popcorn words are sight words. They were each written inside a piece of popcorn that the children would color. The child who colored the nicest had their pieces cut out and displayed on our wall.
Every Friday we played "Popcorn Bingo". I would call out the words that they already had from previous weeks and they would cover it with a piece of popcorn (if they had the word of course). I would also write the word on the board for those who still struggled.
In my third grade classroom I don't use a word wall. Instead I have a stop sign wall. A stop sign wall has about 10 overused words written on individual stop signs. We get into groups and find better words to use. Instead of pretty, use gorgeous. Instead of nice, use gracious. You get the idea. We add to the stop sign wall throughout the year. If a child is caught using a stop sign word in his writing, it is given back for him to pick a better word.
One reason why I'm not a fan of word walls with younger kids (three and early four year olds) is because they serve no purpose other than having the word up on the wall for the child to be exposed to (which is great, but I can think of better uses for wall space). Also, I think it's more important for words to be directly linked to their objects (thus labeling things in your classroom). However, if you want to introduce your young students to words, I think it's better to print off pages from a favorite book (one that's been read a million times), hand them a highlighter, and have them find one word at a time (find all the to's; then next week print it again and find all the "ands").
I think if you are going to have a word wall, you need to use it. Here are some ways to use your word wall:
Find Dolch lists here: http://specialed.about.com/od/literacy/a/dolch.htm