Yes, you can use smoke fluid(Lionel or any of the other popular brands).

Don't use more than 2-3 drops at a time, as the postwar smoke units don't really have a mechanism to retain the fluid. More than 2-3 drops, and you'll end up leaking fluid all over the track.

I'm curious as to your comment about the pellets taking a long time to melt. In my experience, normally it takes about 20-30 seconds for a new pellet to melt. Once it's melted, it only takes a few seconds for it to start working on each subsequent power up.

After 50+ years of use, pellets tend to get into places that they shouldn't, and hamper performance. I strongly suspect that this is what's wrong with yours. It's easy enough to do yourself(feel free to e-mail me for details) or any Lionel service station should be able to take care of it inexpensively. Whatever you do, don't let a service station talk you into doing a liquid conversion, though-they're not nearly as durable as the old pellet units, nor do they work as well. They're also pointless, as you can use liquid smoke in a pellet unit without harm anyway.