In this study, we investigate the changes occurring in the microstructure and thermoelectric properties of PbTe0.9S0.1 alloy (PbTe–PbS) under varying thermal treatment conditions. Transmission electron microscopy (TEM) studies were utilized to reveal the distribution of nano-precipitates in the annealed alloy. PbTe0.9S0.1 alloy with PbS phase precipitates displayed a significant reduction in the thermal conductivity and an enhancement in the Seebeck coefficient. The 47% reduction in lattice thermal conductivity at the measurement temperature of 300°C in the alloy annealed at 400°C was attributed to the phonon scattering occurring due to the presence of nano-precipitates. The annealed alloy displayed higher electrical conductivity at room temperature than that of the alloy without annealing. The maximum figure of merit, ZT, was found to be 0.76 at 300°C in the alloy annealed at 400°C.