We've done it all. I've done shavings, newspaper, paper towels, sand, and straw. From experience, we prefer going straight to shavings. We see the chicks pick at the shavings, but they don't actually eat any of it - just peck at it, see that it's not edible, and leave it.
As for shavings in their water and food, easily solved. Nipple waterer and bucket feeder. Check out:
We made that feeder for our 7 (now 6) other girls, and we absolutely LOVE it. No waste at all! We keep it inside their coop, because there's room and we don't have to worry about rain or anything getting in.
We also do the waterer thing, except with the vertical nipples. I see in that picture that there was the problem of the water under it. It works great outside in our run, but in the brooder we always ended up with soaked shavings. It didn't leak at all, but when they drink out of it, the water sprays all around. It didn't take long for it to make a huge mess. Not sure what I hate more, cleaning out the regular waterer, or cleaning out soggy wood shavings from the brooder floor all the time. Not sure what I'll do this time around... I did always raise their waterer, but they were so crazy in the brooder the wood shavings would end up in there anyway...