Background: There is limited data on the association between diarrhoea among children aged under five years (U5D) and water use, sanitation, hygiene, and socio-economics factors in low-income communities. The study investigated U5D and the associated risk factors in the Zeekoe catchment in Cape Town, South Africa. Methods: A cross-sectional study was conducted in 707 households in six informal settlements (IS) two formal settlements (FS) (March–June 2017). Results: Most IS households used public taps (74.4%) and shared toilets (93.0%), while FS households used piped water on premises (89.6%) and private toilets (98.3%). IS respondents had higher average hand-washing scores than those of FS (0.04 vs. −0.14, p = 0.02). The overall U5D prevalence was 15.3% (range: 8.6%–24.2%) and was higher in FS than in IS (21.2% vs. 13.4%, respectively, p = 0.01). Water storage >12 h was associated with increasing U5D (OR = 1.88, 95% CI 1.00–3.55, p = 0.05). Water treatment (OR = 0.57, 95%CI 0.34–0.97, p = 0.04), good hand-washing practices (OR = 0.59, 95%CI 0.42–0.82, p = 0.002) and Hepatitis A vaccination (OR = 0.51, 95%CI 0.28–0.9, p = 0.02) had significant preventing effects on U5D. Conclusions: The study highlights that good hygiene practice is a key intervention against U5D in informal settlements. The promotion of hand-washing, proper water storage, and hygienic breastfeeding is highly recommended.