M.
My daughter did the same thing when she was 5 (in Kindergarten)...and my husband and I responded the same way at first that you did. We told her it was germy, disgusting, etc. We were worried too that she would eventually be made fun of. Nothing seemed to work. She would just turn around so we couldn't see, or cup her other hand over the crime scene (as if we couldn't see), or hide in a corner, or hide under the sheets of her bed. Nothing was going to stop her, and we realized that our response-style was not solving the problem. So.....
We continued to let her know it was not good to do, but chose a much calmer approach. We explained that other kids/frieends might think she was yucky for doing it, but we did so in a way that was laid back (like with a shrug of our shoulders).
I was in her classroom one day and cracked up when I saw half of the class doing the same thing---and with no hiding it! Though it was a gross thing, it totally relieved me. It is truly an age thing. If i were you, I would continue to explain/remind her of why it is a yucky thing to do and that kids/friends may think so, but in a calm (shrug those shoulders)and less frequent manner. I am not sure exactly when it happened, but my daughter outgrew it. When I volunteer in her First grade classroom, I see that her classmates have outgrown it too. Good luck and don't worry too much.