You can use regular paper or your can get paint strips with multiple colors. You can write each letter on one of the blocks. This will make it more colorful, fun, and helps the kids to distinguish the letters from one another.
Now, let's use the example of "read". If you were to reveal the "d" and have the child read /d/ and then you revealed the "a" and had the child read /ad/ and then the "e", all of a sudden /ad/ changed to /ead/. Therefore, as you are revealing letters, I want you to think of it more as revealing one sound at a time. You would reveal the "d", then the "ea" at the same time, and then the "r". You can explain that "ea" together make one sound; the long e. You may even consider writing the "ea" on one block to explain that each color block is a different sound unit - not just letters.