I used chipboard coasters for this project. I bought 1000 of them awhile back when I started making mini scrapbooks (can't wait to make more of them soon), and I like that they are white and ready to decorate, if I wish.
I chopped mine down to 2" square so that they were a bit larger than one letter. No wasting chipboard for me!
Then I ran them through my die cut machine (Stampin' Up! sells the Big Shot which is pretty awesome, but I don't have one).
This is what you get after it's been through the machine.
Just punch out your letter.