Enhancement of thermopower is achieved by doping the narrow-band semiconductor Ag6.52Sb6.52Ge36.96Te50 (acronym TAGS-85), one of the best p-type thermoelectric materials, with 1 or 2% of the rare earth dysprosium (Dy). Evidence for the incorporation of Dy into the lattice is provided by X-ray diffraction and increased orientation-dependent local fields detected by 125Te NMR spectroscopy. Since Dy has a stable electronic configuration, the enhancement cannot be attributed to 4f-electron states formed near the Fermi level. It is likely that the enhancement is due to a small reduction in the carrier concentration, detected by 125Te NMR spectroscopy, but mostly due to energy filtering of the carriers by potential barriers formed in the lattice by Dy, which has large both atomic size and localized magnetic moment. The interplay between the thermopower, the electrical resistivity, and the thermal conductivity of TAGS-85 doped with Dy results in an enhancement of the power factor (PF) and the thermoelectric figure of merit (ZT) at 730 K, from PF = 28 μW cm−1 K−2 and ZT ≤ 1.3 in TAGS-85 to PF = 35 μW cm−1 K−2 and ZT ≥ 1.5 in TAGS-85 doped with 1 or 2% Dy for Ge. This makes TAGS-85 doped with Dy a promising material for thermoelectric power generation.