Background Open defecation (OD) is a widespread problem in the developing world. This practice facilitates the transmission of diarrheal diseases. In Ethiopia, still the national open defecation rate in 2014 was 34.1% (37.9% in rural and 8.7% in urban). Objective To assess diarrheal morbidity in under-five children and its associated factors in Dangla district, Northwest Ethiopia, 2016. Methods A community-based comparative cross-sectional study design with a multistage random sampling technique was applied. The total sample size was 550 (275 ODF and 275 OD). Descriptive and inferential statistics were done. Results A total of 525 participants were interviewed making the response rate 95.45%. The prevalence of diarrhea was 9.9% in ODF and 36.1% in OD kebeles. In ODF kebeles, child immunization (AOR = 0.037; 95% CI: 0.006–0.243), latrine presence (AOR = 0.036; 0.006–0.233), water shortage (AOR = 8.756; 95% CI: 1.130–67.831), and solid waste disposal (AOR = 0.143; 95% CI: 0.020–0.998) have statistically significant association with diarrhea occurrence. While in OD kebeles child immunization (AOR = 0.032; 95 CI: 0.008–0.123), water access of 7.5–15 liters/day (AOR = 0.029; 95% CI: 0.006–0.152), water shortage (AOR = 18.478; 95% CI: 4.692–72.760), and proper solid waste disposal (AOR = 0.023; 95% CI: 0.005–0.117) have significant association with diarrhea occurrence. Conclusions The overall prevalence of under-five diarrhea was low in ODF kebeles as compared with OD kebeles. The study showed that child immunization, latrine presence, water shortage in household, and solid waste disposal practices had statistically significant association with diarrhea occurrence in ODF kebeles, while water access at the individual level, water shortage in household, child immunization, and solid waste disposal have statistically significant association with diarrhea occurrence in OD kebeles. Integrated efforts are needed from the Ministry of Health together with line ministries and developmental partners in improving latrine utilization at household level, water shortage in households, and solid waste disposal practices.