Disclaimer right up front: This is a time consuming task and creates a lot of little paper clippings to clean up.
Since my girls are totally into this type of project it saves me from needing to do it all. We found sight words in magazines - aiming for larger size words and ones I want to teach Dean. Some words are easy to find (notice the 2 you's below), others I am still searching for.
I only include this picture of the paper going through the machine because the kids thought this process was awesome!
Find nice large letters that are understandable to an early reader. Dean, at age 4, only knows the alphabet - capital and lowercase. He doesn't recognize letters well enough to include cursive letters, for example. Since my daughters kinda took over the project there are some letters in here that don't work - too small, hard to read. No biggie. :)
I found these really cool free sight word printables on Pinterest (http://blog.maketaketeach.com/teaching-sight-words/) -- I wanted a few different words, so I needed to make my own as well, but I liked the concept they created. Dean used letters to spell the words and also the bin of sight words. He liked finding the whole word - but I noticed giving him all 50 words we cut out was too much. So we chose 5 words to start with and put only 10 words in the bin to choose from. This was much better for him.
We can add more words as he learns them, but we are just starting out at this point, so I did not want to overwhelm him.
This was a great project for Dean because he loves letters but struggles with writing and pencil grip still. He had fun finding letters and making the words. Mostly though, he enjoyed putting letters in ABC order!
My daughters both have Dyslexia and Dysgraphia so writing is VERY difficult for them, as is spelling in general. They are great readers but struggle with spelling and handwriting. So they took the bin of letters and used them to spell out the spelling words they had been struggling with this week. They had fun and as visual learners this helped them remember the words a bit better. Very cool!