A concept of functionally graded thermoelectric materials (FGTEMs) with graded material properties is proposed, in which the material properties are both temperature and spatially dependent. In this paper, we study the performance of a functionally graded thermoelectric (TE) element, including the temperature field, heat flux, power output, and energy conversion efficiency. The results suggest that it is necessary to take into account the temperature-dependent material properties to analyze the performance of functionally graded TE device accurately. Meanwhile, the data show that there is a significant increment in the power output and energy conversion efficiency if proper material property gradients are achieved. Additionally, the results indicate that thermal conductivity has a considerable influence on the temperature field and heat flux distribution, while the Seebeck coefficient plays a critical role in the power output and efficiency of energy conversion. In order to validate the proposed model, it was applied to an experimental case of a functionally graded bismuth antimony TE couple where the numerical results showed good agreement with the experimental data.