The reduction of thermal conductivity, and a comprehensive understanding of the microstructural constituents that cause this reduction, represent some of the important challenges for the further development of thermoelectric materials with improved figure of merit. Model PbTe-based thermoelectric materials that exhibit very low lattice thermal conductivity have been chosen for this microstructure–thermal conductivity correlation study. The nominal PbTe0.7S0.3 composition spinodally decomposes into two phases: PbTe and PbS. Orderly misfit dislocations, incomplete relaxed strain, and structure-modulated contrast rather than composition-modulated contrast are observed at the boundaries between the two phases. Furthermore, the samples also contain regularly shaped nanometer-scale precipitates. The theoretical calculations of the lattice thermal conductivity of the PbTe0.7S0.3 material, based on transmission electron microscopy observations, closely aligns with experimental measurements of the thermal conductivity of a very low value, ∼0.8 W m−1 K−1 at room temperature, approximately 35% and 30% of the value of the lattice thermal conductivity of either PbTe and PbS, respectively. It is shown that phase boundaries, interfacial dislocations, and nanometer-scale precipitates play an important role in enhancing phonon scattering and, therefore, in reducing the lattice thermal conductivity.