Your example and the documentation are in perfect accord. And I played around with it. However, when I plug it into my LilyPond file, it compresses considerably (!) Please see attached picture. I put all my Lyrics settings into your example and it still works as expected.
\context {
\Score
\allowGrobCallback font-interface.font-size
}
\context {
\Lyrics
\override VerticalAxisGroup.staff-affinity = #UP
\override VerticalAxisGroup.nonstaff-relatedstaff-spacing.padding = #1
\override VerticalAxisGroup.nonstaff-nonstaff-spacing =
% Default staff space is 5pt. Scale to 12pt.
#'((basic-distance . 12/5) (minimum-distance . 0) (padding . 0) (stretchability . 0))
\override LyricText.self-alignment-X = #CENTER
lyricMelismaAlignment = #CENTER
\override LyricHyphen.minimum-distance = #0.5
% \override LyricText.font-size =
% % Default font-size is 11pt. Scale to 10pt.
% #(magnification->font-size 10/11)
\override LyricText.font-size = \absFontSize 10
\override LyricText.font-name = #"Palatino LT Std Roman"
}