It is well known that the microstructure of metallic materials determines the mechanical properties. However, the effect of microstructure on thermal conductivity lacks an accurate quantitative description of this relationship. In this work, the mechanism of variation in mechanical and thermal conductivities with microstructure was revealed by the characterization of cast, heat-treated, and extruded Mg-xZn-yGd-0.6Zr (wt%) alloys: ZV66, ZV62, and ZV26. The contributions of solution atoms, second phases, grain size, and dislocations to the yield strength and thermal conductivity were quantitatively calculated, and their effects on the plasticity and work-hardening behavior were qualitatively analyzed. The results show that hot extrusion promotes the precipitation of nanoprecipitates, such as MgZn2, Mg4Zn7, and Mg5Gd, resulting in the reduction of Zn and Gd solute atoms and the introduction of high-density dislocations and grain boundaries. The extruded ZV66 alloy exhibits excellent mechanical properties and thermal conductivity (a tensile yield strength of 232 MPa, an elongation of 22 %, and a thermal conductivity of 127.6 W/(m·k)); these values are better than those reported for similar products. The achievement of high strength and thermal conductivity is attributed to the precipitation of solute atoms to improve thermal conductivity in addition to grain boundary strengthening and work-hardening strengthening to improve strength. These findings provide new insights into achieving excellent strength–thermal conductivity property amalgamations in magnesium alloys by tailoring their microstructure.