It is well known that power system stabilizers (PSSs) may cause adverse impacts to the transient performance of generator terminal and field voltages when they are not properly designed. This fact, in special for distribution networks with synchronous generators, is relevant from the voltage quality point of view since the operation of sensitive equipments connected to the network may be deteriorated. Based on these facts, this paper proposes an iterative method to tune PSSs for distributed synchronous generators (DSGs) that performs an effective trade-off between transient voltage performance and oscillation damping enhancement. Our proposed tuning procedure uses an optimization algorithm that works over a formulation of the classical tuning problem in terms of bilinear matrix inequalities (BMIs). Using this formulation, it is possible to apply linear matrix inequality (LMI) solvers to find a solution to the tuning problem via an iterative process, with the advantage that these solvers are widely available and have well-know convergence properties. The system that was analyzed has 1 feeder, 7 buses and a cogeneration plant injecting 10 MW to the network.