We investigate the microstructure evolution of Ag-alloyed PbTe compounds for thermoelectric (TE) applications with or without additions of 0.04 at. % Bi. We control the nucleation and temporal evolution of Ag2Te-precipitates in the PbTe-matrix applying designated aging heat treatments, aiming to achieve homogeneous dispersion of precipitates with high number density values, hypothesizing that they act as phonon scattering centers, thereby reducing lattice thermal conductivity. We measure the temperature dependence of the Seebeck coefficient and electrical and thermal conductivities, and correlate them with the microstructure. It is found that lattice thermal conductivity of PbTe-based compounds is reduced by controlled nucleation of Ag2Te-precipitates, exhibiting a number density value as high as 2.7 × 1020 m−3 upon 6 h aging at 380 °C. This yields a TE figure of merit value of ca. 1.4 at 450 °C, which is one on the largest values reported for n-type PbTe compounds. Subsequent aging leads to precipitate coarsening and deterioration of TE performance. Interestingly, we find that Bi-alloying improves the alloys’ thermal stability by suppressing microstructure evolution, besides the role of Bi-atoms as electron donors, thereby maintaining high TE performance that is stable at elevated service temperatures. The latter has prime technological significance for TE energy conversion.