PbTe alloys have been the most efficient materials for thermoelectric power generation since the 1950s. In addition to the observed lattice thermal conductivity reduction by alloy scattering, recent efforts targeting electronic-transport enhancement through band structure engineering have demonstrated a design route to achieve extraordinary thermoelectric performance. Guided by these recent results, the current work discusses the influence of alloying CdTe in p-type PbTe where the solubility is strongly temperature-dependent. Beneficial changes to the band structure and effective scattering of phonons are concurrently inferred when the PbTe–CdTe precipitate composite is expected to become a solid solution at high temperature, enhancing the peak thermoelectric figure of merit to ~1.7. This work emphasizes the importance of solid solution alloys of PbTe for thermoelectric power-generation applications and also provides an upper limit of about 1 micrometer to the average distance between interfaces above which phonon scattering by composite interfaces is ineffectual.