Abstract Background Staphylococcus aureus has been associated with the exacerbation and severity of atopic dermatitis (AD). Studies have not investigated the colonisation dynamics of S. aureus lineages in African toddlers with AD. We determined the prevalence and population structure of S. aureus in toddlers with and without AD from rural and urban South African settings. Methods We conducted a study of AD-affected and non-atopic AmaXhosa toddlers from rural Umtata and urban Cape Town, South Africa. S. aureus was screened from skin and nasal specimens using established microbiological methods and clonal lineages were determined by spa typing. Logistic regression analyses were employed to assess risk factors associated with S. aureus colonisation. Results S. aureus colonisation was higher in cases compared to controls independent of geographic location (54% vs. 13%, p < 0.001 and 70% vs. 35%, p = 0.005 in Umtata [rural] and Cape Town [urban], respectively). Severe AD was associated with higher colonisation compared with moderate AD (86% vs. 52%, p = 0.015) among urban cases. Having AD was associated with colonisation in both rural (odds ratio [OR] 7.54, 95% CI 2.92–19.47) and urban (OR 4.2, 95% CI 1.57–11.2) toddlers. In rural toddlers, living in an electrified house that uses gas (OR 4.08, 95% CI 1.59–10.44) or utilises kerosene and paraffin (OR 2.88, 95% CI 1.22–6.77) for heating and cooking were associated with increased S. aureus colonisation. However, exposure to farm animals (OR 0.3, 95% CI 0.11–0.83) as well as living in a house that uses wood and coal (OR 0.14, 95% CI 0.04–0.49) or outdoor fire (OR 0.31, 95% CI 0.13–0.73) were protective. Spa types t174 and t1476, and t272 and t1476 were dominant among urban and rural cases, respectively, but no main spa type was observed among controls, independent of geographic location. In urban cases, spa type t002 and t442 isolates were only identified in severe AD, t174 was more frequent in moderate AD, and t1476 in severe AD. Conclusion The strain genotype of S. aureus differed by AD phenotypes and rural-urban settings. Continued surveillance of colonising S. aureus lineages is key in understanding alterations in skin microbial composition associated with AD pathogenesis and exacerbation.