The present study examined the construct and predictive validity of a dynamic test of decoding. In theory, a dynamic test provides a direct measure of potential for learning. In this study, children were taught 3 novel letters and how to blend the sounds of those into new words, then they were tested on different words comprising the 3 letters. The study followed 171 children from kindergarten to the end of Grade 1. The dynamic test was found to add significantly to the longitudinal prediction of word reading difficulties at the end of Grade 1 even after controlling for a wide range of standard predictors. The dynamic test correlated strongly with concurrent measures of early reading, letter knowledge, and phoneme awareness but less strongly with vocabulary and nonverbal intelligence. It is suggested that the dynamic test taps learning of sublexical units and processing essential for initial reading development.