In a heavy-bottomed saucepan, combine water, milk, bay leaf, and salt. Bring to a boil over medium-high heat.
Lower heat and slowly whisk in the grits. Cover and simmer for about 15 minutes, stirring occasionally until thick and velvety.
In a large skillet, fry chopped bacon until crisp. Remove bacon with a slotted spoon to a paper towel-lined plate, keeping the fat in the pan.
Season shrimp with Cajun seasoning. Sauté in the bacon fat for 2 minutes per side until pink and opaque. Remove shrimp and set aside.
In the same skillet, sauté red bell pepper and garlic for 2 minutes. Stir in smoked paprika, parsley, and half the green onions.
Pour in broth to deglaze, scraping up brown bits. Simmer for 3 minutes. Return shrimp and bacon to the pan and toss with a squeeze of lemon.
Remove bay leaf from grits. Stir in butter and shredded cheddar until melted. Serve the shrimp mixture over the creamy grits.
Notes
If the grits stiffen up, whisk in a splash of warm milk. Watch your shrimp closely—pull them off the heat as soon as they form a 'C' shape to avoid toughness.