Cut and sand the wood to the desired size. Have your local hardware store cut it for you, or cut with a saw. Sand using a sander or sandpaper; wipe down with a clean damp cloth afterwards.
Paint the wood the color you would like the letters to be. Use a foam brush; give the wood two coats. Let dry completely before transferring vinyl.
Cut the template out of vinyl and apply to the wood (transfer tape comes in handy for this). Use a scraper to make sure your vinyl is adhered properly. Remove the transfer tape.
Roughly go over the letters with the base paint - do this to seal the edges and prevent bleeding from the top paint coat (underneath the vinyl).
Paint the top coat with warm white. Use a dry brush for the top paint to give a streaky, rustic feel. Paint the sides and the backside as well.
Remove the sticker stencils from sign once the paint is dry.
Sand to distress - again, I used my trusty palm sander for this - it just makes everything so easy. You can also use sandpaper though it may take a bit longer to give you the results you are looking for. You can also opt not to distress again.
Coat the sign with polycrylic (once dry) to protect and seal it, especially if you are hanging it outside.
Drill the sign with a 1/16" drill bit on the top at each end. Attach the hooks.
Finish by tying jute cord on the eye hooks in the length desired. Hang.
Video
Notes
Step 5: I also used petroleum jelly on the edges and some of the surface before painting to give my sign a more distressed look (it acts as a resist).